IBM Sales Dragged Down By Missed Deals

IBM blames revenue shortfall on sales execution issues, but analysts ask whether the cloud is driving structural changes in IT spending.
IBM reported Thursday that its financial results for the first quarter missed expectations with revenues falling 5% compared to the same quarter last year and earnings coming in at $3 per share, 5 cents lower than expected by Wall Street analysts. The company blamed the shortfall on poor sales execution and lower-than-expected demand for hardware.

"Despite a solid start and good client demand we did not close a number of software and mainframe transactions that have moved into the second quarter," IBM chairman, president and CEO Ginni Rometty said in statement. "Looking ahead, in addition to closing those transactions, we expect to benefit from investments we are making in our growth initiatives and from the actions we are taking to improve under-performing parts of the business."

IBM CFO and senior VP Mark Loughridge offered plenty of detailed explanations for the shortfall during a conference call on Thursday, but financial analysts asked whether cloud computing might be cutting into conventional IT sales. Oracle, too, recently cited poor sales execution and a continued slide in hardware sales for its fiscal third quarter ended in February. With two tech stalwarts suffering bad quarters, it's natural to wonder whether structural changes in tech spending are taking place.

[ What's the comparison with Oracle's results? Read Oracle's Bad Quarter Is Self-Inflicted. ]

IBM's quarterly revenue for the three months ended March 31 was $23.4 billion, down 5% overall and 3% in constant currencies from the same quarter last year. Breaking out IBM's core Services, Software and Systems & Technologies businesses -- representing roughly 60%, 24% and 13% of revenues, respectively -- the biggest shortfall was in the hardware-focused Systems & Technologies area, where revenue was down 14% (excluding the results of the Retail Store Solutions business that IBM sold last year).

Drilling down on hardware results, IBM System Z (mainframe) sales were up 7%, but that was lower than expected, and Loughridge said that some $400 million in anticipated mainframe and related software transactions weren't closed.

"We should have closed on those deals and we thought we had them right up until the end," he said, noting that this year's early Easter vacation period may have pushed back some sales.

IBM's sales of Power Systems servers (used in Unix and Linux deployments) were down 32% despite the introduction of new low-end and midrange Power 7+ servers in early February. Oracle's hardware sales, which include a mix of (x86-based) Engineered Systems and Orcle Sun Sparc servers for Unix and Linux, were down 30.7% in its most recent quarter.

These recent results confirm that the Unix market is in decline, and, indeed, Loughridge said that IBM will shift the focus of the Power business to the Linux market, which is seeing growing sales of servers for high-performance computing.

"Once again Power [servers and storage] picked up share, but it doesn't mean much if you're declining at double digits," Loughridge said. "We need to move more strongly into new opportunity spaces like Linux ... which is now as big as the Unix market, and it's growing rapidly."

The Wall Street Journal reported Thursday that IBM is in talks with Lenovo to sell its x86-based System X server business, which declined 9% year-over-year on the quarter. These servers tend to offer low margins, although IBM also uses x86 chips and various PureSystems products integrating software and hardware.

Loughridge vowed that IBM will redouble its sales efforts, regain momentum in high-growth markets including China and accelerate to the second quarter "workforce rebalancing" actions (code for layoffs in some areas and acquisitions in others) to ensure that company earnings stay on track for the $16.70-cents-per-share target the company set at the beginning of the year. Most of the rebalancing will take place outside of the U.S., he said.

Two analysts asked Loughridge whether customers are "taking a step back" or "reconsidering their IT infrastructures" with cloud computing options in mind. IBM's CFO stuck with the line that missed big deals -- and this year's early Easter -- made all the difference in the results.

IBM itself reported that its cloud revenue, which is not broken out, was up 70% in the latest quarter. Cloud leaders Amazon Web Services and, meanwhile, are both experiencing heady growth. Amazon Web Services is said to be on track for $3.8 billion in revenue in 2013 and expects to reach a $4 billion run rate this year.

As the late U.S. Senator Everett Dirkson reportedly once said in the context of government spending, "a billion here, a billion there, pretty soon, you're talking real money."

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