IBM's Q2 Earnings Improve, Hardware Continues to Lag

IBM posted improved earnings for its second quarter of 2014 despite another quarter of down revenues–the company's ninth in a row.

IBM revenue

For its second quarter of 2014, IBM saw an improvement over previous recent quarters with better-than-expected net income of $4.1 billion on revenues of $24.4 billion.

Indeed, the second-quarter net income of $4.1 billion is a 28 percent increase over the $3.2 billion the company made in the second quarter of last year, while total revenues of $24.4 billion were down 2 percent from the same quarter last year.

“Generally, I'd qualify this as good though not great quarter. However, compared to the severe losses reported last quarter there is likely a sense of relief among many folks at IBM headquarters,” said Charles King, principal analyst with Pund-IT. “Moreover, the company's executives expressed bullish expectations for the second half of the year so I expect IBM will hit its sales and revenues targets for 2014. Plus, fiscal restraint and the sale of assets like the customer care outsourcing business make it likely that the company will achieve expected profits.”

IBM revenues from its software segment were $6.5 billion, up 1 percent compared with the second quarter of 2013. Revenues from IBM’s key middleware products, which include WebSphere, Information Management, Tivoli, Workforce Solutions and Rational products, were $4.3 billion, up 1 percent versus the second quarter of 2013. Operating systems revenues of $530 million were down 13 percent compared with the prior-year quarter.

“We had good growth in several of our strategic areas, cloud, big data and analytics, mobile and security,” said Martin Schroeter, IBM senior vice president and chief financial officer, during IBM’s earnings call with analysts.

“Across our software brands, Software-as-a-Service offerings are growing very quickly," Schroeter said. "This quarter our SaaS offerings grew by nearly 40 percent. Looking at our results by brand, WebSphere had another good quarter, up 5 percent at constant currency, led by app server, commerce and mobile solutions. Both on-premise and SaaS offerings contributed to WebSphere growth, with the majority of WebSphere growth coming from on-premise solutions. Our application server business delivered strong growth, with an increase in demand for on-premise software that was driven by mobile and analytics workloads. We continue to have strong growth in MobileFirst, leveraging over 5,000 mobile experts, and our expanding capabilities.”

Schroeter mentioned IBM’s enterprise mobility partnership with Apple as an example of how aggressively the company is making its transformation. “Supporting our partnership with Apple, our Software Group will develop unique enterprise cloud services native for iOS, to deliver the full enterprise-class mobile experience from analytics, to cloud storage and data security,” he said.

However, hardware was a different story. Hardware sales have been lagging for IBM over the last several quarters and continue to be a sore spot. Revenues from IBM’s Systems and Technology segment totaled $3.3 billion for the quarter, down 11 percent from the second quarter of 2013. Total systems revenues decreased 11 percent. Revenues from System z mainframe server products decreased 1 percent compared with the year-ago period. Total delivery of System z computing power, as measured in MIPS (millions of instructions per second), was flat. Revenues from Power Systems were down 28 percent compared with the 2013 period. Revenues from System x were down 3 percent. Revenues from System Storage decreased 12 percent and within this business area, flash storage grew more than 100 percent. Revenues from Microelectronics OEM decreased 18 percent.