If you’re not clear why IBM figures are so important for the IT industry, then the Q1 figures that have just been released should explain. Despite a good start to the year, its revenues plummeted by 5% as its hardware business took a hammering and it failed to close off a number of multi-million dollar sales.
The bad news didn’t stop there, though, as IBM reacted quickly to the fall off in revenues by announcing that it will slash its workforce -- principally outside the US -- and sell off some of its business units over the next quarter.
Profit performance was 5 cents below expectations of US$ 3.05 a share, the first time IBM has failed to meet market expectations since 2005.
Late last night, there were already reports circulating that it was in discussions with Lenovo to sell off its small server business, a rumor which IBM’s Chief Financial Officer, Mark Loughbridge, refused to confirm during the Q1 earnings call. The small server unit sells low-priced servers traditionally used to power large corporate data centers.
The sale of this business to Lenovo makes sense though. Beijing-based Lenovo bought IBM's PC unit in 2005 in a US$ 1.25 billion stock and cash deal while CRN reported earlier in the week that according to an unnamed source close to the deal, IBM is looking for US$5 to US$6 billion for the business.
Neither IBM nor Lenovo have confirmed the rumor, but neither have they denied it, which in itself is telling.
But back to the figures. It needs to be clear that IBM is not in trouble here. It still reported a profit for the quarter with first quarter earnings of US$ 3 billion on revenue of US$ 23.4 billion, but down 5% on the same period last year, which is where the anxiety comes from.
IBM, Revenues IT
Revenues have been modest for all IT firms over the past few years, but there were signs at the beginning of the year that a corner had been turned. And yes, it’s still possible that this is case. But for this to register on a company as big as IBM takes a while, especially with currency fluctuations and differences in economic performance in the regions it operates in.
And performance has been variable across the different regions, the only common factor being that it was down everywhere. Even in China, which all IT companies have set their eyes on as a potential growth market.
In the BRICS countries -- Brazil, Russia, India and China, South Africa -- revenues were down by a relatively modest 1%, while Europe, Middle East and Africa (EMEA) was US$ 7.3 billion in the first quarter, down 4%. Revenues in the US were also down 4% to US$ 10 billion, while the Asia-Pacifc region really took a blow with revenues down 7% to US$5.7 billion.
There are parts of our business that are in transition or have been underperforming, like elements of our Power, [System] x and storage product lines that showed disappointing performance in the first quarter…Here we're going to take substantial actions," he said, without offering details,” Loughbridge said.
But are the figures all that surprising? Remember that IBM in the past two years has said that it would gradually change its business model moving to what it identified as more lucrative markets like big data, analytics, mobile security, while pushing its software sales.
It is clear that someone in IBM had predicted that hardware sales would become increasingly uncertain, just as they did for other IT giants like HP.
However, the 5% fall-off is going to push IBM to make the move into these markets a lot quicker than might have been expected.
Software sales were also disappointing with no movement on last year and revenues of US$ 5.6 billion even if pre-tax income increased 4 percent and pre-tax margin increased to 31.5 percent.
Revenues from key middleware products, which include WebSphere, Information Management, Tivoli, Social Workforce Solutions (formerly Lotus) and Rational products, were US$ 3.5 billion, up 1% over the first quarter of 2012.
Operating systems revenues of US$ 578 million were down 2 percent (down 1 percent, adjusting for currency) compared with the prior-year quarter. Meanwhile, the WebSphere family saw revenues of 6 percent year over year although it was a mixed bag:
- Information Management software revenues -2%
- Tivoli +1%.
- Social Workforce Solutions (formerly Lotus) + 8 %
But there is some good news in there. Big Data and the development of big data services are to be the priority over the next two years until the end of 2015. At that point, IBM is expecting it to be worth US$ 20 billion in annual revenue up from its previous estimates of US$ 16 billion in the previous forecasts.
If the quarter just closed was a tough one, then Q2 and subsequent quarters are going to be pretty tough for those working at IBM as it adjusts to bounce back.
Loughbridge said that they will be spending US$ 1 billion on cutting jobs, continuing a trend that that it started some years ago, but which will be more pronounced this year, it seems. However, for employees in the US there was some respite as IBM made it clear that the majority of the cuts would be outside the US.
At the end of last year it had 467,000 workers, up 7.8% from the previous year. Where the ax will fall has yet to be announced, but look at where it’s going product-wise and it should be easy enough to work out. More on this when the Q2 figures are released.