For its second quarter of 2014, IBM saw an improvement over previous recent quarters with better-than-expected net income of $4.1 billion on revenues of $24.4 billion.
Indeed, the second-quarter net income of $4.1 billion is a 28 percent increase over the $3.2 billion the company made in the second quarter of last year, while total revenues of $24.4 billion were down 2 percent from the same quarter last year.
“Generally, I’d qualify this as good though not great quarter. However, compared to the severe losses reported last quarter there is likely a sense of relief among many folks at IBM headquarters,” said Charles King, principal analyst with Pund-IT. “Moreover, the company’s executives expressed bullish expectations for the second half of the year so I expect IBM will hit its sales and revenues targets for 2014. Plus, fiscal restraint and the sale of assets like the customer care outsourcing business make it likely that the company will achieve expected profits.”
IBM revenues from its software segment were $6.5 billion, up 1 percent compared with the second quarter of 2013. Revenues from IBM’s key middleware products, which include WebSphere, Information Management, Tivoli, Workforce Solutions and Rational products, were $4.3 billion, up 1 percent versus the second quarter of 2013. Operating systems revenues of $530 million were down 13 percent compared with the prior-year quarter.
“We had good growth in several of our strategic areas, cloud, big data and analytics, mobile and security,” said Martin Schroeter, IBM senior vice president and chief financial officer, during IBM’s earnings call with analysts.
“Across our software brands, Software-as-a-Service offerings are growing very quickly,” Schroeter said. “This quarter our SaaS offerings grew by nearly 40 percent. Looking at our results by brand, WebSphere had another good quarter, up 5 percent at constant currency, led by app server, commerce and mobile solutions. Both on-premise and SaaS offerings contributed to WebSphere growth, with the majority of WebSphere growth coming from on-premise solutions. Our application server business delivered strong growth, with an increase in demand for on-premise software that was driven by mobile and analytics workloads. We continue to have strong growth in MobileFirst, leveraging over 5,000 mobile experts, and our expanding capabilities.”
Schroeter mentioned IBM’s enterprise mobility partnership with Apple as an example of how aggressively the company is making its transformation. “Supporting our partnership with Apple, our Software Group will develop unique enterprise cloud services native for iOS, to deliver the full enterprise-class mobile experience from analytics, to cloud storage and data security,” he said.
However, hardware was a different story. Hardware sales have been lagging for IBM over the last several quarters and continue to be a sore spot. Revenues from IBM’s Systems and Technology segment totaled $3.3 billion for the quarter, down 11 percent from the second quarter of 2013. Total systems revenues decreased 11 percent. Revenues from System z mainframe server products decreased 1 percent compared with the year-ago period. Total delivery of System z computing power, as measured in MIPS (millions of instructions per second), was flat. Revenues from Power Systems were down 28 percent compared with the 2013 period. Revenues from System x were down 3 percent. Revenues from System Storage decreased 12 percent and within this business area, flash storage grew more than 100 percent. Revenues from Microelectronics OEM decreased 18 percent.
IBM’s Q2 Earnings Improve, Hardware Continues to Lag
“While still down, our hardware year-to-year revenue performance improved significantly from the first quarter rate, driven by our System z mainframe, System x and storage,” Schroeter said.
“In the second quarter, we made further progress on our transformation,” said Ginni Rometty, IBM chairman, president and chief executive officer, in a statement. “We performed well in our strategic imperatives around cloud, big data and analytics, security and mobile. We will continue to extend and leverage our unique strengths to address the emerging trends in enterprise IT and transform our business, positioning ourselves for growth over the long term.”
Big Blue’s Global Services segment revenues decreased 1 percent to $13.9 billion. Global Technology Services segment revenues decreased 1 percent to $9.4 billion. And Global Business Services segment revenues were down 2 percent to $4.5 billion.
“Services were flat or slightly down, though global financing did well,” King said. “Performance by the software group was solid. System z showed some stability–down just 1 percent compared to a year ago, but that was the one bright spot in the hardware group–a disappointment given that the company announced its first POWER8-based Power Systems solutions during the quarter. I expect Power sales to improve in the second half of the year but the group will bear watching. One bright note; IBM’s flash-based systems grew 100 percent year over year.”
Geographically, the Americas’ second-quarter revenues were $10.6 billion, a decrease of 1 percent from the 2013 period. Revenues from Europe/Middle East/Africa (EMEA) were up 1 percent at $7.9 billion. Asia-Pacific revenues decreased 9 percent to $5.3 billion. Meanwhile, revenues from the company’s growth markets were down 7 percent and revenues in the BRIC countries — Brazil, Russia, India and China — were down 2 percent.
“In the first quarter, you’ll remember that we announced a number of initiatives that support the shift to our strategic areas of data, cloud, and systems of engagement,” Schroeter said. “These included the launch of Bluemix, which is our cloud platform-as-a service for the enterprise, it included a $1.2 billion investment to globally expand SoftLayer cloud hubs, and it included a $1 billion investment to bring Watson’s cognitive capabilities to the enterprise. In the second quarter, we made progress to implement these initiatives, including in June, Bluemix became generally available, we opened new SoftLayer data centers, we started to ship POWER8, and expanded the OpenPOWER consortium, and we completed substantially all of the divestiture of our customer care business.”
In a research note on the earnings, Andrew Smith, an analyst with Technology Business Research (TBR), wrote, “TBR believes IBM’s current portfolio and strategy will allow it to attract the large enterprise accounts and developer support it needs to sustain momentum. TBR also expects IBM to spend significant resources through R&D and acquisitions in a bid to motivate partners and developers to populate IBM’s cloud ecosystem with applications and solutions for mobile, social and analytics.”
Overall, IBM’s transactional businesses are shifting to higher value as the company evolves its portfolio by investing in capabilities in some areas, while divesting businesses that don’t support IBM’s shift to high value.
“We continue to drive these shifts,” Schroeter said. “We took Bluemix live, are adding new SoftLayer cloud hubs, and we are ramping our investment to commercialize Watson. We’ve introduced POWER8 for big data and cloud at the entry level and are expanding OpenPOWER consortium. And we have committed $3 billion spend to drive chip innovation, while launching an important new partnership with Apple to extend IBM’s position in the enterprise mobile space.”
Moreover, “Like many of its competitors–notably HP–IBM continues to carefully manage its transition away from traditional hardware and services solutions,” King said. “The strategy and solutions focus that depends on software-based differentiation appears to be working well. The company should also profit as global economies improve. Best of all, IBM’s new and emerging businesses are showing progress, including 50 percent growth in cloud services, developments in Watson-based analytics solutions and services, and mobile efforts–highlighted by this week’s Apple partnership.”