IBM 2Q Results Hint Of Turnaround

IBM keeps investing in growth areas, but its sales slump continues. Talks with GlobalFoundaries on chip plant takeover reportedly stall.
12 Tech Greats: Where Are They Now?
12 Tech Greats: Where Are They Now?
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IBM on Thursday reported mixed financial results for its second quarter ended June 30. Despite increased profits and a couple of encouraging trends, revenues declined for the ninth consecutive quarter.

The biggest drag on IBM's results continued to be its Systems and Technology (hardware) business, which was down 11.4% from the prior-year quarter to $3.3 billion. Revenues for Global Technology Services (-1.3% to $9.4 billion), Global Business Services (-1.6% to $4.5 billion), and Software (+1% to $6.4 billion) were essentially flat. Total quarterly revenue was down 2.2% to $24.3 billion.

Despite declining sales, IBM's net income increased 28% over the prior-year quarter to $4.1 billion. The profit difference was mainly due to a $1 billion workforce rebalancing write-off in the second quarter of 2013, an annual move that was pushed into the first quarter of 2014.

[Want more on IBM's latest mobile move? Read Apple, IBM Deal: When Siri Meets Watson.]

In the Systems and Technology segment, mainframe sales held up with a 1% decline, and the System X X86 server line had a 3% decline. The loss leader continued to be the IBM Power line, which was off 28%. Among the encouraging signs was that declines in this segment weren't as steep as in recent quarters, which IBM CFO Martin Schroeder described as a sign that the hardware business is stabilizing. Another encouraging sign was a less-steep decline in China in the second quarter, where sales shortfalls were acute in 2013.

IBM is selling its low-margin System X business to Lenovo, but that deal is still pending regulatory approval. Rumors have also been circulating that IBM is trying to sell its chip-manufacturing operations, with plants in New York and Vermont, to GlobalFoundaries. But the Poughkeepsie Journal, citing sources close to the matter, reported this week that those talks have stalled. The on-again, off-again talks with Lenovo dragged on for more than a year before they settled on a price for the X86 business.

IBM's strategy has long been to get out of low-margin businesses and to invest in important growth areas. This week the company announced a high-profile mobile alliance with Apple, which is seen as driving big-data and analytics opportunities for IBM. Last week the company announced a $3 billion commitment to stay in the research and design aspects of the chip business by investing in next-generation nanoscale technologies, seen as replacing today's silicone-based chips.

In June, IBM announced a revamped Bluemix platform-as-a-service offering for cloud development. The company previously announced billions in investment to expand Softlayer cloud data centers and commercialize the Watson cognitive computing technologies.

"We have transactional businesses that are shifting to higher value, and we're continuing to evolve the portfolio, investing in capabilities in some areas while divesting businesses that don't support our shift to high value," Schroeder explained in a conference call with financial analysts.

Strategic areas for IBM including cloud, big data, analytics, mobile, and security all saw "good growth," according to Schroeder, with SaaS subscriptions growing nearly 40%. But the gains in these areas, which are pockets within IBM's larger business units, could not overcome lagging demand for other products and services.

This has been the general pattern for more than two years. But with the hardware and China markets stabilizing and growth areas rising at double-digit rates, Schroeder saw hope that "performance will accelerate in the second half."

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