IBM Beats Q2 Estimates, Sees Systems Revenue Fall

By Darryl K. Taft  |  Posted 2013-07-17

IBM Beats Q2 Estimates, Sees Systems Revenue Fall

IBM beat expectations in its second-quarter 2013 earnings, despite a shortfall of 12 percent in its Systems and Technology revenue.

Excluding a $1 billion “workforce rebalancing” charge, IBM exceeded analyst expectations and reported earnings per share(EPS) of $3.91, which beat analyst expectations of $3.77 per share.

With the restructuring, IBM net income dropped 17 percent, from $3.9 billion in the second quarter of 2012 to $3.2 billion this year. Big Blue also saw total revenues fall for the quarter. Total revenues for the second quarter of 2013 of $24.9 billion were down 3 percent from the second quarter of 2012.

“The workforce restructuring had significant impact on our year-to-year profits,” said Mark Loughridge, IBM senior vice president and chief financial officer, in a call with analysts.

IBM has been under pressure since falling short in revenue and net income in the first quarter, missing its earnings estimates for the first time in eight years. At that time, IBM decided to launch a restructuring effort that would cost the company $1 billion in severance and other expenses related to trimming its workforce. According to the Alliance@IBM, an IBM employee organization, more than 3,000 jobs have been eliminated in this round of layoffs.

“In the second quarter, we delivered strong performance in our higher-value software and mainframe businesses and again significantly increased our services backlog on growth in new business,” said Ginni Rometty, IBM chairman, president and chief executive officer, in a statement.

“Going forward, we will continue investing in our strategic growth initiatives, acquiring and divesting capabilities, re-balancing skills and taking action in the areas that are not performing. We expect continued improvement through the second half of the year and remain confident that we will achieve our increased 2013 operating EPS expectation of at least $16.90, excluding the $1 billion workforce rebalancing charge in the second quarter.”

Loughridge said a substantial second-half gain IBM was expecting in its prior view of earnings per share will not likely be achieved the end of 2013. As a result, the company updated its prior full-year EPS expectations, including the impact of a second-quarter $1 billion workforce rebalancing charge, to at least $16.25, with the net impact of $0.45 driven by the elongated discussions for its larger divestiture project.

Not going into any detail on this divestiture project, Loughridge said IBM has a “very disciplined M&A process” and the company would not under price or rush a divestiture just to close it in 2013.

IBM Beats Q2 Estimates, Sees Systems Revenue Fall

However, he noted that IBM has some very strong tailwinds heading into the second quarter of 2013, particularly in the software pipeline. “We have a very good software pipeline going into the second half of the year,” he said.

For the second quarter, revenues from IBM’s software segment were $6.4 billion, up 4 percent compared with the second quarter of 2012. Revenues from IBM’s key middleware products, which include WebSphere, Information Management, Tivoli, Social Workforce Solutions (formerly Lotus) and Rational products, were $4.3 billion, up 9 percent versus the second quarter of 2012. Operating systems revenues of $606 million were down 4 percent compared with the prior-year quarter.

Breaking things down a bit further, revenues from the WebSphere family of software products increased 9 percent year over year. Information Management software revenues increased 5 percent. Revenues from Tivoli software increased 13 percent. Revenues from Social Workforce Solutions increased 22 percent, and Rational software increased 12 percent.

Revenues from the Systems and Technology segment totaled $3.8 billion for the quarter, down 12 percent from the second quarter of 2012. Excluding Retail Store Solutions (RSS), revenues were down 8 percent. Total systems revenues, excluding RSS, decreased 10 percent. Revenues from Power Systems were down 25 percent compared with the 2012 period. Revenues from System x were down 11 percent. However, revenues from System z mainframe server products increased 10 percent compared with the year-ago period. Total delivery of System z computing power, as measured in MIPS (millions of instructions per second), increased 23 percent. Revenues from System Storage decreased 7 percent. And revenues from Microelectronics OEM increased 6 percent, IBM said.

In its services business, IBM’s Global Technology Services segment revenues decreased 5 percent to $9.5 billion and Global Business Services segment revenues were down 1 percent to $4.6 billion. IBM’s estimated services backlog as of June 30 was $141 billion, up 3 percent year over year, Loughridge said.

“We’re exiting this quarter stronger than we entered it,” Loughridge said.

He said the workforce restructuring will begin to “yield” or pay off in the third quarter of 2013 and then continue in the fourth quarter of 2013 and the first and second quarters of 2014.

Loughridge also said the majority of the expense for the workforce rebalancing is spent “overseas, outside the U.S.” He said about $600 million of the $1 billion figure benefits services, with about $200 million going to both software and services.

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