IBM's quarterly revenue sinks to 5-year low as hardware sales fall

Wed Apr 16, 2014 7:10pm EDT

1 of 2. A man walks past the headquarters of IBM Japan in Tokyo March 18, 2010.

Credit: Reuters/Toru Hanai

Related Topics

(Reuters) - IBM Corp reported its lowest quarterly revenue in five years on Wednesday as the company struggles with falling demand for its storage and server products.

Shares of Big Blue fell about 4 percent to $188.20 in after-hours trade.

Total revenue fell 4 percent to $22.5 billion in the first quarter, below analysts' average estimate of $22.91 billion.

"They have had eight revenue declines in a row. They have missed so many times, it's hard to keep track of it," said Fred Hickey, editor of The High-Tech Strategist newsletter, which is widely read by investors.

The revenue was the lowest since the first quarter of 2009, when revenue was $21.71 billion.

Revenue from the hardware business, which includes servers and systems storage, plunged 23 percent to $2.4 billion.

IBM has been restructuring its business, with job reductions and the sale of its low-end server business to Chinese PC maker Lenovo Group Ltd for $2.3 billion in January, in efforts to achieve its targeted operating earnings of $20 per share by 2015.

The company on Wednesday reiterated its full-year operating earnings target of $18 per share.

"They used to be a leader. Now they sell one business after the next. That is not a way to grow," Hickey, who has followed IBM for 30 years, said.

IBM warned that its hardware business may continue to face hurdles.

"As we look to the balance of 2014, we continue to expect good performance in the key growth areas, though our overall revenue growth will be impacted by the challenges in our hardware business," Chief Financial Officer Martin Schroeter said on a conference call.

Revenue in the Americas fell 4 percent, while revenue dropped 12 percent in Asia Pacific and declined 11 percent in emerging markets such as Brazil, Russia, India and China.

Software was the only major business to show some growth, with revenue rising 1.6 percent to $5.66 billion, but the growth rate was slower than the fourth quarter's 2.8 percent.

Last month, the technology research firm Gartner reported that IBM lost its spot as the world's No. 2 software make behind Microsoft Corp. Oracle Corp claimed that spot, which IBM had held for years.

"They are not yet getting the kind of lift off of software that they would need to pump up overall IBM revenues into positive growth territory," Forrester analyst Andrew Bartels said.

BETTING ON CLOUD

IBM plans to spend more than $1.2 billion to expand its web-based software products, better known as cloud computing.

IBM said its cloud revenue was up more than 50 percent in the quarter. The annual run rate of cloud delivered as a service doubled from last year to $2.3 billion.

Moving to the cloud allows businesses to cut costs by ditching bulky servers for network-based software and using remote data centers run by technology companies.

Recently, IBM has bought two companies to expand its cloud business, Silverpop, a developer of cloud-based marketing software, and cloud-based database software startup Cloudant.

The company spent $3.1 billion to acquire 10 companies in 2013.

In January, IBM said it will invest more than $1 billion to establish a new business unit for Watson - the supercomputer system that beat humans on the television quiz show "Jeopardy" - deployed on SoftLayer cloud computing infrastructure business the company bought last year [ID:nL3N0KJ22N]

The global cloud services market last year grew by almost a fifth to an estimated $131 billion, according to research firm Gartner. IBM Markets Intelligence estimates the market could be as big as $200 billion by 2020.

"We don't see where the upside is going to come, unless there is something major -- a major restructuring or other major change," Tim Ghriskey, chief investment officer with Solaris Asset Management, which helps manage some $1.5 billion, told Reuters.

Ghriskey said Watson has yet to yield any blockbuster products capable of turning around the revenue declines. "Watson is a way to give them visibility, something for salesmen to talk about."

Q1 PROFIT FALLS

IBM's first-quarter net profit fell to $2.38 billion, or $2.29 per share, from $3.03 billion, or $2.70 per share, a year earlier.

The results included a $870 million charge related to job cuts, the company said.

On an adjusted basis, the company earned $2.54 per share.

Analysts on average had expected earnings of $2.54 per share, according to Thomson Reuters I/B/E/S.

The stock, which gained 4.6 percent over the last three months, closed at $196.40 on the Nasdaq on Wednesday.

(Additional reporting by Marina Lopes in New York and Jim Finkle in Boston; Editing by Sriraj Kalluvila and Leslie Adler)

FILED UNDER: