IBM Sees Hardware Decline in Q3

IBM experienced a significant decline in hardware revenues in its third quarter 2013 earnings.

IBM delivered mixed third-quarter earnings, with revenues down 4 percent and net income up 6 percent, led by high growth opportunities and dragged down by declining hardware sales.

IBM reported total revenues for the third quarter of 2013 of $23.7 billion, down 4 percent from the third quarter of 2012. And third quarter net income was $4 billion compared with $3.8 billion in the third quarter of 2012.

Big Blue took a hard hit in hardware, where revenues from the Systems and Technology segment totaled $3.2 billion for the quarter, down 17 percent from the third quarter of 2012. Although System z revenue grew 6 percent, total systems revenues decreased 19 percent, IBM said. Revenues from Power Systems were down 38 percent compared with the 2012 period. Revenues from System x were down 18 percent. Total delivery of System z computing power, as measured in MIPS (millions of instructions per second), increased 56 percent. Revenues from System Storage decreased 11 percent. And revenues from Microelectronics OEM increased 1 percent.

Meanwhile, IBM also suffered in its growth markets, which are typically strong for the company.

“In hardware, growth in System z mainframe was more than offset by declines in Power, System x and Storage,” said Mark Loughridge, IBM senior vice president and chief financial officer, in a call with analysts. “Two-thirds of the overall hardware decline was driven by the growth markets.”

Loughridge added that “from a geographic perspective, our challenge this quarter was in growth markets–where revenue was down 9 percent, or 5 percent at constant currency. Our performance in growth markets has historically outpaced major markets by eight to 10 points, but this quarter, for the first time, the growth markets trailed the majors.”

Ginni Rometty, IBM chairman, president and chief executive officer, in a statement, said, “In the third quarter we continued to expand operating margins and increased earnings per share, but fell short on revenue. Where we had identified high growth opportunities and pursued them aggressively--cloud, mobile, business analytics and security--we continued to show strong growth. This underscores our strategy to continuously transform the company to high value. We are taking action to improve execution in our growth markets unit and in the elements of our hardware businesses that are under performing. Given these actions, our strategic initiatives and the strength of our model, we are maintaining our view for the full year and remain confident in our ability to achieve at least $20 operating EPS [earnings per share] in 2015.”

Loughridge fought to back up this claim during the call, noting that “we never said the roadmap progression would be a straight line.” Loughridge also noted that IBM had “two major headwinds that hit us hard.” One is a $1 billion year-to-year profit decline in hardware and the other a $500 million impact from currency, he said.

However, IBM’s software and services business “has been moving down the field at the rate we’re looking for,” Loughridge said. He maintains that IBM is in line with its trajectory of reaching EPS of $20 by 2015 if the company can stabilize its hardware business.