IBM Q1 Earnings Drop As Hardware Sales Decline

By Darryl K. Taft  |  Posted 2014-04-16

IBM Q1 Earnings Drop As Hardware Sales Decline

While continuing to move to transform its portfolio to higher-value businesses, IBM saw its first quarter of 2014 earnings slide–the eighth straight quarter of revenue decline for the company.

IBM’s net income for the quarter was $2.4 billion, down 21 percent from the same period a year ago. Total revenues for the quarter were $22.5 billion, down 4 percent from the first quarter of 2013.

A decline in hardware sales took a heavy toll on IBM’s first quarter earnings, as hardware revenues dropped 23 percent. Specifically, IBM’s System z mainframe business saw a 40 percent decline. Total delivery of System z computing power, as measured in MIPS (millions of instructions per second), decreased 19 percent. Revenues from Power Systems were down 22 percent compared with the 2013 period. Revenues from System x, which IBM recently sold to Lenovo, were down 18 percent. Revenues from system storage decreased 23 percent, and revenues from IBM's Microelectronics OEM business decreased 16 percent.

“System z is a core franchise which provides mission critical infrastructure for our customers, and we continue to invest in the platform,” IBM senior vice president and CFO Martin Schroeter declared during IBM’s earnings call. “Software will grow, but the hardware declines will continue,” he said.

Indeed, software revenue was up during the quarter. Revenues from IBM’s Software Group were up 2 percent to $5.7 billion. Revenues from IBM’s key middleware products, which include WebSphere, Information Management, Tivoli, Workforce Solutions and Rational products, were $3.7 billion, up 4 percent versus the first quarter of 2013. More specifically, revenues from WebSphere increased 12 percent, Information Management software revenues increased 1 percent, revenues from Tivoli software increased 7 percent, revenues from Workforce Solutions software decreased 4 percent, and Rational software increased 1 percent.

IBM said its Q1 results include the impact of a charge of approximately $870 million for workforce rebalancing and a gain of nearly $100 million for the divestiture of the customer care outsourcing business.

Meanwhile, IBM said its transition to new businesses is in full swing and the investments the company is now making will soon pay off.

“In the first quarter, we continued to take actions to transform parts of the business and to shift aggressively to our strategic growth areas including cloud, big data analytics, social, mobile and security,” said Ginni Rometty, IBM chairman, president and CEO, in a statement. “As we move through 2014, we will begin to see the benefits from these actions. Over the long term, they will position us to drive growth and higher value for our clients.”

During the call, Schroeter shed further light on how IBM is transitioning to key growth areas, and transforming parts of the business.

IBM Q1 Earnings Drop As Hardware Sales Decline

“In the quarter, we announced a $1.2 billion investment to globally expand our SoftLayer cloud hubs,” he said. “We launched BlueMix, our new Platform-as-a-Service to speed deployment of hybrid clouds. We acquired both Aspera and Cloudant to extend our capabilities in big data and cloud. We’re expanding our ecosystem around OpenPOWER. And we created an integrated business unit around Watson and announced a billion dollar investment to bring cognitive capabilities to the enterprise.”

Schroeter also noted IBM’s commitment of $100 million to expand our consulting services capability with 10 new IBM Interactive Labs and 1,000 employees to address client experience design and engagement.

Charles King, principal analyst at Pund-IT, said he believes IBM’s transition strategy will pay off.

“While no company wants to experience soft earnings, IBM’s position is similar to many global IT vendors that are hastening to account for changes in their traditional businesses and to seize entirely new opportunities,” King said. “On the services side—long a driver for IBMs revenues—the company is shifting toward higher margin/value areas and away from sectors like the call center business the company recently sold. While last quarter’s hardware sales were disappointing, IBM is revving up or developing next gen solutions for its signature enterprise systems. Software remains a bright light for IBM, particularly its middleware portfolio, and its Global Financing returns were solid.”

However, services and growth markets – which IBM often look to for positive results -- saw declines in Q1. IBM’s Global Technology Services revenues were down 3 percent and Global Business Services segment revenues were flat.

Revenues from the company’s growth markets decreased 11 percent. Particularly, revenues in the BRIC countries — Brazil, Russia, India and China — decreased 11 percent.

“There are major shifts in our industry driven by data, cloud, and changes in the way individuals are engaging,” Schroeter said. “This quarter we had good performance in our offerings that address these shifts. Our business analytics revenue was up 6 percent at constant currency on a large base. Our cloud revenue was up over 50 percent, with doubling of our cloud “as a service” business, and we had strong growth in mobile and security.”

Yet, as IBM continues with its transformation, some observers question whether cost cutting measures such as workplace rebalancing and divesting itself of lower-margin businesses will be enough to buoy the company as the transition sets in.

“Former IBM CEO Lou Gerstner was famous for likening managing IBM to teaching an elephant to dance,” King said. “That’s good for a laugh but the fact is that when a company with 400k+ employees enters a transformational process, executing a careful waltz is preferable to tangoing your way into a pratfall. To my mind, IBM is progressing with an admirable mix of energy and restraint; exiting areas that can no longer deliver needed results, developing new efforts into businesses that can succeed over time and navigating through some exceedingly complex global business and economic waters. Overall, my outlook for IBM is positive.”

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