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IBM continued on its course of trying to move to higher-value business as its sales in more traditional sectors continue to drop.
On its third-quarter earnings call, IBM spoke in terms of “continuing operations,” meaning operations of the parts of the company not being divested. Third-quarter net income from continuing operations was $3.5 billion, compared with $4.1 billion in the third-quarter of 2013, a decrease of 17 percent.
Meanwhile, total third-quarter revenues from continuing operations of $22.4 billion were down 4 percent from the third-quarter of 2013.
The company also announced the divestiture of its semiconductor business to GlobalFoundries, a deal that will have IBM paying GlobalFoundries $1.5 billion over three years as Big Blue also continues its previously announced $3 billion investment over five years for semiconductor technology research to lead in the next generation of computing. The agreement with GlobalFoundries will enable IBM to further focus on fundamental semiconductor research and the development of future cloud, mobile, big data analytics and secure transaction-optimized systems.
“We are disappointed in our performance,” Ginni Rometty, IBM chairman, president and CEO, said in a statement. “We saw a marked slowdown in September in client buying behavior, and our results also point to the unprecedented pace of change in our industry. While we did not produce the results we expected to achieve, we again performed well in our strategic growth areas—cloud, data and analytics, security, social and mobile—where we continue to shift our business. We will accelerate this transformation.
“We are executing on a clear strategy that is moving IBM to higher value, and we’ve taken significant actions to exit nonstrategic elements of the business. This includes the announcement that we will divest semiconductor manufacturing to focus on research and development that will differentiate our systems. We will continue to make the investments and the changes necessary to manage our business for the long term. And we remain fully committed to returning significant value to shareholders through dividends and share repurchase.”
Meanwhile, uncharacteristically joining Martin Schroeter, IBM senior vice president and chief financial officer, on the company’s earnings call, Rometty, assured financial analysts that IBM is properly positioning itself for a turnaround. “We are managing this company for the long term,” she said. “Our company is fundamentally better positioned than a few years ago.”
Asked by one analyst why this time should be any different than other moves IBM has made to right itself—including workforce reductions and divesting lower-value businesses—Rometty spelled out the strategic investments IBM has made over the past year, including the $1.2 billion investment to build up SoftLayer, the $1 billion investment in Watson with the IBM Watson Group, and the $1 billion investment in the Bluemix platform-as-a-service, among others. Rometty also cited recent deals struck with Apple and SAP in the mobile and cloud spaces, respectively.
Yet, revenues from IBM’s typically strong sectors saw a downturn in the quarter. Revenues from the software segment were $5.7 billion, down 2 percent from the third-quarter of 2013. And revenues from IBM’s key middleware products, which include WebSphere, Information Management, Tivoli, Workforce Solutions and Rational products, were $3.7 billion, down 1 percent.
IBM’s Financial Struggles Continue in Q3 2014
In addition, revenues from the company’s growth markets were down 6 percent and revenues in the BRIC countries —Brazil, Russia, India and China—were down 7 percent. IBM’s Global Services segment revenues decreased 3 percent to $13.7 billion. The Global Technology Services segment revenues decreased 3 percent to $9.2 billion, and the Global Business Services segment revenues were down 2 percent to $4.5 billion.
On the hardware front, which has been struggling over the past quarters, revenues from continuing operations from the Systems and Technology segment totaled $2.4 billion for the quarter, down 15 percent from the third quarter of 2013. Revenues from Power Systems were down 12 percent from the 2013 period. Revenues from System x were down 10 percent. And revenues from System z mainframe server products decreased 35 percent, compared with the year-ago period.
Andrew Smith, an analyst with Technology Business Research, said he had two key takeaways from IBM’s earnings report. One is that Rometty retracted the $20 operating earnings per share by the 2015 target, “signaling that market changes are forcing IBM to reprioritize spending and investments in ways that they were not originally planning to,” he said. Secondly, “this underscores the fact that changes in the enterprise IT market are happening even faster than the best and brightest in the industry anticipated, and IBM’s results are another indication of how long and complex the road to customer satisfaction is in today’s enterprise environment,” Smith said.
“IBM’s results were obviously disappointing, but I’m not overly concerned about the company’s longer-term strategy or prospects,” said Charles King, principal analyst at Pund-IT. “Like many other vendors, IBM is caught in an unenviable position where its customers’ fears about the global economy and how it will affect their business performance are directly impacting IT purchasing decisions. We saw a similar sort of reticence in 2008 as the world was heading into the Great Recession. Things aren’t anywhere near as dire this time around but significant, understandable concerns about business demand and growth prospects remain.”
King also noted that while IBM’s performance needs to improve, there were some bright spots, including growth in demand for its SoftLayer-based cloud services. “The fact that the company is making that organization a separate business unit signals a larger optimism about and faith in the future of its cloud strategy,” he said. “It’s also worth pointing out that even though it failed to meet earnings projections, IBM remains far more profitable and pays significantly higher dividends than any of its competitors. As a result, I expect analysts and speculators are far more concerned today than the company’s shareholders.”
Rob Enderle, a longtime IBM watcher and founder of the Enderle Group, agreed that IBM is showing positive signs with its turnaround strategy.
“I actually think they are making good progress with SoftLayer and Watson, showcasing where they are going,” Enderle said. “The x86 pivot was ugly, but that is because the negotiations and approvals dragged on so long. … In contrast to the public companies, those that have gone private [Dell/BMC] seem to be doing far better faster, suggesting this ‘going private’ path should be considered more widely. Both HP and IBM are clearly struggling to accomplish similar things while public and the ‘activist investors’ have become a nightmare and, personally, I think it is well past time the SEC stepped in and stopped these ‘investor/blackmailers’ from destroying these firms. They have an unfair advantage of leverage over other investors and they are forcing things like debt-financed stock buybacks, which aren’t in the long-term best interest of the firms.”