IBM Q2 2012 Profit Up 6% Despite Revenue Decline

IBM announced that its earnings for the second quarter of 2012 included a 6 percent increase in profit, despite a 3 percent decline in revenue.

IBM reported second-quarter revenue of $25.8 billion, down 3 percent from a year earlier, but net income rose 6 percent in this interval to $3.9 billion.

IBM said currency negatively impacted revenue growth by approximately $1 billion.

€œIn the second quarter, we delivered strong profit, earnings per share and free cash flow growth. This performance reflects continued strength in our growth initiatives and investments in higher-value opportunities,€ Ginni Rometty, IBM president and chief executive officer, said in a statement. €œThese are fundamental elements of our long-term business model.

€œLooking ahead, we are well-positioned to deliver greater value to a wider range of clients and to our shareholders. Given our performance in the first half and our outlook for the second half, we are raising our full-year operating earnings per share expectations to at least $15.10.€

Revenue from both software and services€”which typically lead the way for IBM€”were both flat and down for the second quarter of 2012, providing a hole for Big Blue to pull out of. Revenue from the software segment was $6.2 billion, flat compared with the second quarter of 2011. Software pre-tax income increased 8 percent and pre-tax margin increased to 35.9 percent.

Moreover, revenue from IBM€™s key middleware products, which include WebSphere, Information Management, Tivoli, Lotus and Rational products, was $3.9 billion, flat versus the second quarter of 2011. Operating systems revenue of $628 million was flat (up 3 percent, adjusting for currency), compared with the prior-year quarter. And revenue from the WebSphere family of software products increased 3 percent year-over-year. Information Management software revenue decreased 1 percent. Revenue from Tivoli software increased 2 percent. Revenue from Lotus software decreased 8 percent, and Rational software decreased 7 percent.

IBM€™s Global Technology Services segment revenue decreased 2 percent, to $10 billion; while the company€™s Global Business Services segment revenue was down 4 percent, to $4.7 billion. Pre-tax income from Global Technology Services increased 24 percent, and pre-tax margin increased to 17.1 percent. Global Business Services pre-tax income increased 7 percent, and pre-tax margin increased to 16.6 percent. The estimated services backlog at June 30 was $136 billion, down 6 percent year-over-year at actual rates, or flat, adjusting for currency.

With software and services both flat or down, IBM was unable to make up the slack in other segments. Revenue from IBM€™s hardware group, the Systems and Technology segment, totaled $4.3 billion for the quarter, down 9 percent from the second quarter of 2011. Systems and Technology pre-tax income decreased $159 million. Total systems revenue decreased 7 percent. Revenue from Power Systems fell 7 percent from the 2011 period. Revenue from System x dropped 8 percent. Revenue from System z mainframe server products decreased 11 percent, compared with the year-ago period. Total delivery of System z computing power, as measured in MIPS (millions of instructions per second), decreased 8 percent. Revenue from IBM System Storage decreased 4 percent, and revenue from IBM€™s Retail Store Solutions decreased 4 percent year-over-year. Revenue from Microelectronics OEM decreased 22 percent.

Meanwhile, from a geographic perspective, the Americas€™ second-quarter revenue was $11.1 billion, a decrease of 1 percent from the 2011 period. Revenue from Europe/Middle East/Africa (EMEA) was $7.9 billion, down 9 percent. However, Asia-Pacific revenue increased 2 percent to $6.3 billion. And OEM revenue of $512 million dropped 24 percent from the 2011 second quarter.

Revenue from the company€™s growth markets increased 2 percent, and more than 30 countries had double-digit revenue growth, adjusting for currency. Revenue in the BRIC countries€”Brazil, Russia, India and China€”increased 5 percent.

Geographically, growth markets accounted for 22 percent of IBM€™s revenue last year, and IBM expects to see that increase to 30 percent by 2015. IBM also has said it expects software to account for 50 percent of overall profit by 2015.

IBM has maintained a keen interest in growth markets as it drives toward its 2015 goal of having growth initiatives contribute about $20 billion in incremental revenue growth by 2015. Those growth initiatives include cloud computing, growth markets, business analytics and Smarter Planet.

In terms of the good news for IBM last quarter, despite just a 2 percent increase in growth markets, IBM€™s other three growth initiatives fared well during the first half of 2012. Business analytics revenue was up 13 percent in the first half. IBM€™s Smarter Planet revenue was up more than 20 percent in the first half. And cloud revenue doubled from first-half 2011 revenue.