IBM Sales Slide As £607m Charge Looms

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IBM sales miss expectations amid hardware struggles and a looming $1 billion restructuring charge

IBM has once again missed its earnings targets, after Big Blue revealed that during the fourth-quarter 2013, its revenue had dipped 5 percent.

That decline marked the fourth quarter in a row that the company has missed targets, and the seventh consecutive quarter its revenue has fallen.

‘Odd’ Quarter

Hit hard by shortfalls in hardware sales after IBM’s Systems and Technology revenue declined 26 percent, the company announced that top executives would forgo their 2013 bonuses. IBM also plans to take a restructuring charge of $1 billion (£607 million) in the first quarter of 2014.

virginia Romtty IBM CEO“We continued to drive strong results across much of our portfolio and again grew earnings per share in 2013,” said Ginni Rometty, IBM chairman, president and chief executive officer, in a statement. “While we made solid progress in businesses that are powering our future, in view of the company’s overall full year results, my senior team and I have recommended that we forgo our personal annual incentive payments for 2013.”

Fourth-quarter net income, which includes benefits from tax audit settlements, rose to $6.2 billion (£3.8bn) compared with $5.8 billion (£3.5bn) in the fourth quarter of 2012, an increase of 6 percent, IBM said. Fourth-quarter revenues meanwhile were down 5 percent to $27.7 billion (£16.8bn) and full-year 2013 revenues were also down 5 percent to $99.8 billion (£60.5bn).

“It was an obviously disappointing but odd quarter in many ways, with decent to good growth in high margin software segments undercut by flat or poor performance in global services and a nasty drop across the hardware portfolio,” said Charles King, principal analyst at Pund-IT. “At least some of the hardware problems are due to seasonal slowdowns and to dropping mainframe sales – as the pool of potential system upgrade customers dries up. But IBM Power Systems continues to be on an alarming downward slope, reflecting continuing troubles across the greater UNIX market that IBM has largely been immune to. Finally, there were significant losses in AsiaPac and growth markets, especially the BRIC [Brazil, Russia, India and China] countries. What’s especially painful about this point is that those regions have often been bright spots in past IBM earnings reports.”

Meanwhile, IBM continues its effort to shift its focus to higher value opportunities such as business analytics, cloud computing and its Smarter Planet initiative.

”As we enter 2014, we will continue to transform our business and invest aggressively in the areas that will drive growth and higher value,” Rometty said. “We remain on track toward our 2015 roadmap for operating EPS [earnings per share] of at least $20 (£12), a step in our long-term strategy of industry leadership and continuous transformation.”

Hardware Pain

Yet, for the fourth quarter of 2013, IBM’s revenues from the Systems and Technology Group (STG) segment were $4.3 billion (£2.6bn) for the quarter, down 26 percent from the fourth quarter of 2012. Total systems revenues decreased 25 percent. Revenues from System z mainframe server products decreased 37 percent compared with the year-ago period. Total delivery of System z computing power, as measured in MIPS (millions of instructions per second), decreased 26 percent versus the prior year. Revenues from Power Systems decreased 31 percent compared with the 2012 period. Revenues from System x decreased 16 percent and revenues from System Storage decreased 13 percent. Revenues from Microelectronics OEM decreased 33 percent. IBM is reportedly in talks to sell off its System x business.

“Hardware continued to impact our overall performance,” said Martin Schroeter, IBM’s senior vice president and chief financial officer, during IBM’s Q4 earnings call. “We’re dealing with some challenges in our hardware business models specific to Power, storage and x86. As expected, in System z we’re impacted by the product cycle, as we wrapped on very strong performance from a year ago. Together, these dynamics significantly impacted our revenue growth, and profit.”

Schroeter said that although IBM’s hardware business suffers from “business model issues,” the company is not counting hardware out of the equation. “Our game plan for Systems and Technology is flat profit year-to-year” in 2014, but that is not where IBM plans to leave things. He said the System z business is cyclical and will come back around. And IBM is making other strategic moves to get its hardware house in order.

Divisional Performance

In its software segment, IBM’s Q4 revenues were $8.1 billion (£4.9bn), up 3 percent from the fourth quarter of 2012. Revenues from IBM’s key middleware products, which include WebSphere, Information Management, Tivoli, Social Workforce Solutions and Rational products, were $5.8 billion (£3.5bn), an increase of 5 percent versus the fourth quarter of 2012. Revenues from the WebSphere family of software products increased 14 percent year over year. Information Management software revenues increased 5 percent. Revenues from Tivoli software increased 1 percent. Revenues from Social Workforce Solutions increased 2 percent, and Rational software was flat.

On the services front, IBM Global Technology Services revenues decreased 4 percent to $9.9 billion (£6bn) and Global Business Services (GBS) segment revenues were up 1 percent to $4.7 billion (£2.8bn). IBM’s estimated services backlog at December 31 was $143 billion (£87bn), up 2 percent.

“It still seems challenges from last quarter in hardware and storage, and growth markets – China – continue and don’t seem to be fixing till second half of 2014,” Christopher Ambrose, an analyst with Gartner. “I think the backlog in GBS is positive. The challenge is having enough growth in growth initiatives – cloud, analytics, mobile, Watson – to offset hardware challenges.”

Workplace Restructuring

Schroeter said IBM would take a $1 billion “workplace rebalancing” or restructuring charge, “plus or minus $100 million (£61m),” in the first quarter of 2014. IBM took a similar charge in 2013 as the company cut headcount. Lee Conrad, national coordinator for the Alliance@IBM, an IBM employee organisation, said his group received information that names of IBM employees slated to be laid off must be turned into senior management by 24 January for a resource action in STG.

Meanwhile, IBM’s move to address higher value trends is rearing fruit, Schroeter said. “Smarter Planet grew about 20 percent year to year, with strength across all areas, including smarter commerce, industry solutions, smarter cities and social business.”

Moreover, Schroeter noted that IBM is banking on data as a natural resource driving demand going forward, and big data/analytics providing the basis for competitive differentiation for IBM.

“In 2013, we grew business analytics revenue 9 percent led by GBS, and by software,” he said. “This is now nearly a $16 billion (£9.7bn) business for us, which you’ll recall was our original target for 2015. We’ve already taken our 2015 objective for business analytics revenue up to $20 billion. Our cloud solutions address the full scope of customer requirements, private clouds, public clouds and hybrid clouds, as well as platform and SaaS-based solutions. For the year, we delivered $4.4 billion (£2.6bn) of revenue for cloud-based solutions, that’s up 69 percent year to year, and within that, $1.7 billion (£1bn) was delivered as a service. As we’ve said in the past, there’s overlap between these initiatives. In total, software makes up about half of that combined content. This improves our business mix and contributes to our margin expansion.”

IBM last week announced a $1.2 billion (£729m) investment in beefing up its cloud infrastructure, and just prior to that Big Blue announced a new IBM Watson Group with a $1 billion (£607m) investment to fund advances in cognitive computing.

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Originally published on eWeek.

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