IBM's First Quarter Reveals Slow Growth In Crucial Services Business

While earnings posted a 21% gain over a year ago, sales of business and technology services fell 1.2% to $11.6 billion.
IBM on Tuesday reported 2006 first-quarter results that indicate it's having a tough time achieving sales growth in an area where it has staked much of its future--services.

For the period ending March 31, IBM's sales of business and technology services fell 1.2% year-over-year to $11.6 billion. The company's services backlog--a number that represents future customer commitments not yet booked as revenue--stood at $111 billion, essentially flat with the previous year.

IBM's total first quarter revenue came in at $20.7 billion, roughly equal to its fiscal 2005 first-quarter sales when revenue from its now divested PC business isn't included. Earnings increased 21% year-over-year to $1.7 billion, while earnings per share climbed 27% to $1.08. In a statement, IBM CEO Sam Palmisano said IBM's first-quarter performance "underscores the strength of our business model across a balanced portfolio of software, services and hardware."

IBM's revenue from software sales in the first quarter increased a modest 2.4% to $3.9 billion. Within the software group, middleware sales rose 6% to $3 billion, while operating system revenues fell 12% to $520 million. Hardware sales managed a 3% gain to $4.6 billion. IBM's sales of Windows- and Linux-based xSeries servers increased 10%, while sales of Unix-based pSeries servers fell 9%.

With services revenue now accounting for more than half of IBM's total sales, the company needs to find a way to spark growth in that area. That won't be easy, as low-priced Indian competitors are maturing and now pose fierce competition for both customer wins and employees. In recent days, indigenous Indian services vendors Infosys and TCS reported quarterly sales gains of 28% and 36%, respectively. Rivals Wipro, which reports quarterly earnings on Wednesday, and Satyam, expected to report on Friday, are widely expected to post similarly impressive gains, even as IBM's services business stagnates.