IBM Q1 Earnings Drop As Hardware Sales Decline

IBM saw its eighth consecutive quarter of revenue declines with hardware leading the way for the slide as the company moves to higher-value business.

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.