IBM's First Quarter: Where's The Growth? - InformationWeek

InformationWeek is part of the Informa Tech Division of Informa PLC

This site is operated by a business or businesses owned by Informa PLC and all copyright resides with them.Informa PLC's registered office is 5 Howick Place, London SW1P 1WG. Registered in England and Wales. Number 8860726.

Infrastructure // PC & Servers
11:47 AM
Paul McDougall
Paul McDougall

IBM's First Quarter: Where's The Growth?

Big Blue might need to further cut costs to meet earnings goals as its top line sputters, but customers could suffer if it's too aggressive.

9 Startups To Watch In 2012
9 Startups To Watch In 2012
(click image for larger view and for slideshow)
IBM on Tuesday reported anemic revenue gains, as sales grew less than 1% compared to the previous quarter. The tepid results mean the company could be under pressure to cut costs to meet aggressive earnings targets in an environment where IT spending has slowed in key sectors.

Big Blue's total revenue for the quarter came in at $24.7 billion, below analysts' estimates. The miss had IBM shares off by more than 2% in trading early Wednesday.

The quarter did contain several upsides for IBM. Net income was up 7.1% year-over-year, to $3.1 billion, and earnings per share increased 13%, to $2.61. IBM also posted solid revenue gains in areas that it has identified as strategic, such as Smarter Planet (up 25%), analytics (up 14%), and cloud computing (up 100%).

The problem is that those are nebulous categories to which IBM can assign numerous combinations of sales wins to make the numbers look rosy. The situation isn't so bright in real reporting segments for which IBM has to state real numbers--not just percentage gains.

[ Is IBM's PureSystems line the answer to your private cloud needs? See IBM Unveils PureSystems Private Cloud Packages. ]

Software revenues were up 5% to $5.6 billion, but hardware sales fell 7% to $3.7 billion. Mainframe sales in particular were off, by 25%. IBM will be counting on its newly announced PureSystems private cloud servers to boost hardware revenue going forward.

In IBM's Global Services unit, IT outsourcing sales, which account for more than one-third of the company's revenue, were up just 2%, to $10 billion, partly offset by a 2% decline in sales of business operations and consulting services.

Weak public sector demand in the U.S. and a slowdown in Europe and Japan, which is still recovering from last year's tsunami, were partly to blame for IBM's flat top line. Big Blue wasn't alone in feeling the pinch. Intel said Tuesday that quarterly sales grew just .5%.

IBM's problem is that it has publicly committed to delivering earnings per share of $20 by 2015. To fulfill that promise it will have to grow EPS more than 11% annually over the next four years, in a slow-growth environment.

That means the company will have to continue to cut costs, but it has already plucked the low-hanging fruit. It has off-shored and automated considerable portions of its operations while trimming U.S. headcount to reduce expenses. Internally, CIO Jeanette Horan is moving key infrastructure, including testing, storage, and desktop, to the cloud, which should save additional cash.

But if its top line doesn't pick up, the question becomes whether the company can continue to cut in order to meet EPS targets without damaging customer relationships. "Investors sometimes question can you continue to grow EPS when revenue growth is so much lower," Sanford C. Bernstein & Co. analyst Toni Sacconaghi told Bloomberg. "At some point, you're going to run out of cost improvements."

There are signs that some of IBM's operations might already be redlining under the pressure to meet margin goals. Officials at Texas utility Austin Energy blamed IBM's failure to perform on a BPO contract in part on the company's margin hunt. IBM also reportedly lost a lucrative outsourcing deal with Disney earlier this year when the entertainment giant handed the engagement to India's HCL Technologies.

The challenge for IBM CEO Ginni Rometty, in her first year at the helm, will be to maintain IBM's profits in a difficult IT spending environment, without disrupting customer services. Rometty didn't make her life any easier when, on Tuesday, she raised IBM's full-year earnings guidance to $15 per share.

The pay-as-you go nature of the cloud makes ROI calculation seem easy. It’s not. Also in the new, all-digital Cloud Calculations InformationWeek supplement: Why infrastructure-as-a-service is a bad deal. (Free registration required.)

We welcome your comments on this topic on our social media channels, or [contact us directly] with questions about the site.
Comment  | 
Print  | 
More Insights
Newest First  |  Oldest First  |  Threaded View
User Rank: Apprentice
4/19/2012 | 4:47:27 PM
re: IBM's First Quarter: Where's The Growth?
I, Cringely has some insights on how IBM intends to meet those high goals.
COVID-19: Using Data to Map Infections, Hospital Beds, and More
Jessica Davis, Senior Editor, Enterprise Apps,  3/25/2020
Enterprise Guide to Robotic Process Automation
Cathleen Gagne, Managing Editor, InformationWeek,  3/23/2020
How Startup Innovation Can Help Enterprises Face COVID-19
Joao-Pierre S. Ruth, Senior Writer,  3/24/2020
White Papers
Register for InformationWeek Newsletters
Current Issue
IT Careers: Tech Drives Constant Change
Advances in information technology and management concepts mean that IT professionals must update their skill sets, even their career goals on an almost yearly basis. In this IT Trend Report, experts share advice on how IT pros can keep up with this every-changing job market. Read it today!
Flash Poll