IBM reported fourth quarter earnings showing another drop in revenue – the 11th consecutive quarterly revenue decline for Big Blue.
IBM announced total revenues of $24.1 billion, down 12 percent from the same quarter last year. Net income also was down. IBM had net income of $5.5 billion for the fourth quarter, down from $6.2 billion for the same time last year – a decrease of 11 percent. Big Blue saw a bit of good news in that it reported earnings per share of $5.81, higher than analyst estimates of $5.41 per share.
IBM’s revenue decline comes in the midst of its strategic transition to higher- value business opportunities and exit from lower-performing businesses like commodity servers and microelectronics. IBM sold off its System x server business to Lenovo last September and its semiconductor business to Globalfoundries in October.
“We are making significant progress in our transformation, continuing to shift IBM’s business to higher value, and investing and positioning ourselves for the longer term,” said IBM CEO Ginni Rometty, in a statement. “In 2014, we repositioned our hardware portfolio for higher value, maintained a services backlog of $128 billion and achieved strong revenue growth across cloud, analytics, mobile, social and security.” Martin Schroeter, IBM’s senior vice president and chief financial officer, said the company’s strategic imperatives continue to drive strong growth, up 16 percent in 2014. “Together cloud, analytics, mobile, social and security generated $25 billion in revenue, which is 27 percent of IBM,” Schroeter said during IBM’s earnings call with analysts. “Analytics was up 7 percent on a large base. And with 60 percent revenue growth, our cloud business is substantial. It’s now $7 billion in revenue, and we exited the year with an annual as-a-Service run rate of $3.5 billion. That’s up from $2.2 billion a year ago.”
IBM recently reorganized its management infrastructure to focus more on the cloud and other strategic initiatives. IBM named company veteran Robert LeBlanc as senior vice president of Cloud. In a memo to employees, Rometty laid out IBM’s focus on the areas of Research, Sales & Delivery; Systems; Cloud; Watson; Security; Commerce, and Analytics.
Revenues from IBM’s software segment were $7.6 billion, down 7 percent compared with the fourth-quarter of 2013. Revenues from IBM’s key middleware products, which include WebSphere, Information Management, Tivoli, Workforce Solutions and Rational products, were $5.4 billion, down 6 percent versus the fourth-quarter of 2013. Operating systems revenues of $557 million were down 19 percent compared with the prior-year quarter.
IBM’s Global Services segment revenues decreased 8 percent to $13.5 billion. Global Technology Services segment revenues decreased 8 percent to $9.2 billion and Global Business Services segment revenues were down 8 percent to $4.3 billion. The estimated services backlog at December 31, 2014 was $128 billion.
On the hardware front, revenues from continuing operations for IBM’s Systems and Technology segment totaled $2.4 billion for the quarter, down 39 percent from the fourth quarter of 2013. Revenues from Power Systems were down 13 percent, revenues from System z mainframe server products decreased 26 percent and revenues from System Storage decreased 8 percent from the same period last year. Meanwhile, IBM last week announced its new z13 mainframe, which the company expects to provide positive results.
IBM Revenue Woes Continue Amid Transition
“We expect the launch of a new mainframe along with the momentum of Power 8 to generate some growth” in IBM’s hardware business, Schroeter said.
According to Jennifer Hamel, an analyst with Technology Business Research, “IBM’s 4Q14 results reflect the company’s continued shift toward higher-value cloud, analytics and mobility engagements and away from commoditized businesses such as customer care BPO and System x servers. Reorganizing its workforce and maintaining heavy investments around next- generation solutions weigh on profits in the short-term, but position IBM for long-term market differentiation as clients evolve how they prefer to engage with IT services providers.”
Hamel added that as IBM pursues this path, its competitors will continue to win battles for traditional application implementation and outsourcing engagements. Yet, IBM’s momentum with hybrid cloud integration and managed services wins indicates that IBM’s investments in cloud, analytics and mobility solutions are catching on with customers.
“I think it’s fair to call 2014 a transition year for IBM,” said Charles King, principal analyst at Pund-IT. “The company has obviously continued to struggle in what have been some of its strongest traditional businesses. That, along with the divestment of some $7 billion in business lines — including the System x server group, microelectronics and the call center services org that together accounted for a half a billion dollars annual loss — meant that IBM had a lot on its plate for most of the year.”
But there were also some bright points, King noted. Among them is “the continuing healthy growth of its strategic priority areas — cloud, analytics, mobile, social and security — which now account for about a quarter of IBM’s annual revenues. There was also solid performance from the services organization — which accounts for about half of IBM’s overall revenues — in carrying a $128 billion business backlog.”
IBM continues to work on its transformation. Schroeter spoke of how in 2014 IBM was successful in bringing Watson’s capabilities to the enterprise and created a burgeoning market for cognitive computing.
“Overall, I expect shareholders will be keeping a close eye on IBM during 2015,” King said. “Hardware will be on the short list of things to watch — as in how well the company’s latest z13 mainframe systems do, and whether efforts around Power Systems, including the OpenPOWER Consortium, gain traction. Plus, I believe many people will be curious to see if the good news in the strategic priority areas continues.”
King said the challenge is that “most of these areas aim to deliver sustainable benefits and growth, not the sort of quarterly pick-me-up that some speculators and institutional investors are fixated on. The fact is that CEO Ginni Rometty and the rest of IBM’s leadership are intent on rebuilding the company for long term success. That may run contrary to current Wall Street fashion but shareholders should profit from IBM’s efforts.”
IBM’s Schroeter noted that IBM feels “great about how we’re exiting 2014. We got a lot done in 2014. We will exit 2015 with a higher- value and higher- margin business.”