News Column

IBM Sales Fall for 9th Straight Quarter

July 18, 2014

Bloomberg News

IBM in Rochester, Minn. (public domain)
IBM in Rochester, Minn. (public domain)

New York: International Business Machines (IBM) reported a ninth straight quarter of declining sales as demand fell for hardware and computer services, underscoring the urgency of its plan to get more revenue from newer businesses like cloud computing.

The shares drifted lower in late trading. Second-quarter revenue dropped two per cent from a year earlier to $24.4 billion, compared with the $24.1 billion that analysts projected on average, according to data compiled by Bloomberg. Adjusted earnings rose to $4.32 a share, one cent higher than analysts' estimates, boosted by cost-cutting and share buybacks.

Chief Executive Officer Ginni Rometty is betting that businesses want to store their data and software applications remotely, in the cloud, and they need IBM to help mine the piles of data they're accumulating.

She's preaching patience to investors, plying them with share repurchases to persuade them to wait for an inflection point where the new technology can propel the company back in the right direction.

"It's become more of a show-me story," Bill Kreher, an analyst at Edward Jones, said. "It leaves investors to gauge how much faith they have in IBM's ability to execute. At some point, investors look at the quality of earnings and would like to see business momentum at its core franchises." The company maintained its forecasts for $18 a share in adjusted earnings this year and $20 a share next year.

Part of that expansion is predicated on the growth of cloud computing sales, which grew 50 per cent in the first six months of the year from the same period in 2013.

Cloud growth

Cloud offerings delivered as a service are now at an annual run rate of $2.8 billion, compared with $2.3 billion as of the first quarter. That's still a fraction of IBM's total $100 billion in revenue last year.

There were signs of improvement in areas where IBM had been struggling. Sales to Brazil, Russia, India and China pared losses, declining two per cent, compared with an 11 percent drop last quarter.

Sales of mainframe servers, the workhorse machines corporate customers have used for decades to run their crucial computing tasks, decreased one per cent an improvement from the 40 per cent decline in the first quarter.

Global services sales, which typically make up more than half of IBM's business, slid one per cent to $13.9 billion. Software revenue was up one per cent from a year earlier to $6.5 billion, a slowdown from two per cent growth in the prior quarter. And even with the improvement in the mainframe business, total hardware sales dropped 11 per cent.

Licencing model

When companies move to cloud computing, software and data can be stored on remote servers, instead of installed on premise.

In the past, many software offerings were sold to customers in a licensing model, where clients pay upfront for the right to use the tools for an allotted amount of time.

With cloud-based services, many offerings are pay-as-you-use, giving customers the opportunity to be more efficient and lower the total payments.

While IBM's cloud business is growing, the fear is that it could take revenue away from its traditional sales model, said Amit Daryanani, an analyst at RBC Capital Markets.

Services revenue, meanwhile, has been hurt as customers put pressure on IBM to lower its fees.

'Pricing pressure'

"Our performance continues to reflect pricing pressure and client contract renegotiations, as well as a reduction in elective projects," IBM Chief Financial Officer Martin Schroeter said about the company's outsourcing business on the earnings conference call.


Bloomberg News via Times of Oman

Original headline: IBM's sales plunge for ninth straight quarter

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