IBM's Quarterly Revenue Sinks as Hardware Sales Fall

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By Supantha Mukherjee
and Soham Chatterjee

IBM, the world's biggest technology services company, reported its lowest quarterly revenue in five years Wednesday, as Big Blue struggles with falling demand for its hardware and faces challenges in growth markets such as China.

Shares of IBM (IBM) fell as much as 4 percent to $188.20 in after-hours trade.

Revenue for the Armonk, N.Y.-based company 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," said Fred Hickey, editor of The High-Tech Strategist newsletter, which is widely read by investors. "They have missed so many times, it's hard to keep track of it."

IBM's first-quarter revenue was the lowest the company reported since the first quarter of 2009, when revenue was $21.71 billion.

Hardware revenue, which includes servers and systems storage, plunged 23 percent to $2.4 billion, as sales in growth markets declined 11 percent, led by Asia-Pacific, where reported revenue declined 12 percent.

IBM has been restructuring its business and laying-off workers in efforts to achieve its targeted operating earnings of $20 a share by 2015. In January, the company agreed to sell its low-end server business to Chinese PC-maker Lenovo Group for $2.3 billion in January.

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

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

All segments of IBM's systems and technology business reported double-digit declines, led by the System z segment that was sold to Lenovo, which fell 40 percent.

The company 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.

China Woes

Revenue in the Americas fell 4 percent, while revenue in the emerging markets of Brazil, Russia, India and China declined 11 percent, led by China where revenue fell by 20 percent.

Although IBM books only about 5 percent of its sales in China, %VIRTUAL-article-sponsoredlinks%declining revenue over the last three quarters has been dragging down the company's emerging markets business overall.

Chief Executive Officer Ginni Rometty has visited China on two occasions in the last three months, seeking to restore trust with Chinese regulators in the wake of last year's revelations by former National Security Agency contractor Edward Snowden of spying. That has undercut business at some U.S.-based multinationals operating in the world's second-biggest economy.

In February, Rometty held meetings with Chinese officials, including Vice Premier Wang Yang, who is responsible for helping to formulate China's economic policy.

"We expect it will take some time for our business in China to improve," Schroeter said.

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 the 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.

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 a share, from $3.03 billion, or $2.70 a 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 a share.

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

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

-Additional reporting by Marina Lopes in New York, Jim Finkle in Boston and Matthew Miller in Beijing.

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