IBM has just released its third quarter results and the numbers do not make pretty reading. While profits beat expectations and were up 6 percent, revenues were down 4 percent as hardware sales crashed and enterprises turned to cloud computing.

Overall Economic Climate

This is just the beginning of the reporting season for the major IT companies and things are not looking too good. If IBM is reporting difficulty in the hardware division, then it’s a sure bet that everyone else is feeling the pinch too.

Add to that the possible impact of the US federal government shutdown on next quarter’s corporate results and the fact that economic reforms are hitting IT sales in China -- something IBM alluded to during the earnings call yesterday – and the IT sector may be looking at a perfect storm in the next two quarters.

However, before anyone starts battening down the hatches, not everything in IBMs figures were bad, despite reactions on Wall St. that pushed stock values down 6 percent in afterhours trading.

IBM’s Hardware Problems

Most of the IBM’s problems this quarter stem from problems in the hardware division, which was down across the board with the notable exception of its System Z mainframe products. For those products, revenues increased 6 percent year-over-year.

Other hardware products, however, pulled down the balance sheet and resulted in a drop of 17 percent to $3.2 billion for the quarter with pre-tax incomes dropping from $291 million to negative $167 million.

By way of explanation, Chief Financial Officer Mark Loughbridge said growth in China had slowed considerably in the past year, that China accounted for about 5 percent of IBM’s business and that 40 percent of that business was in hardware. Overall, then, revenues from System X were down 18 percent, Power Systems revenue fell by 38 percent and System Storage was down 11 percent.

Cloud Computing

However, China can’t explain everything and the principal reason for the problems across the hardware sector are being laid at the door of cloud computing as enterprises move in that direction.

Ironically, cloud computing was one of IBM’s big growth areas in the third quarter, with revenues up more than 70 percent with recent acquisition pushing that growth. For the first time ever, cloud computing passed $1 billion in revenues, of which $460 million was from cloud services.

According to Loughbridge, the purchase of Softlayer earlier in the year significantly improved its capabilities in the public and hybrid cloud space. He said this growth is set to continue in the coming quarters.

However, IBM has said in the past that by 2015 it wants to be posting revenues of $7 billion from cloud computing, which with current figures the way they are might be a little ambitious That said, more companies are moving to the cloud and using cloud services, so anything is possible.

Keep in mind that IBM is also committed to spending a lot more money on acquisitions with only $10 billion of a $20 billion acquisition war-chest spent -- the most recent being Xtify -- leaving another $10 billion to use.

IBM Q3 Figures

Leaving aside cloud computing and hardware, IBM performed as well as might be expected in a stagnant global economy. Overall, revenues were down 4 percent to $23.72 billion compared to $24.74 billion in the same quarter last year. Other notable financial highlights include:

  • Business analytics revenue up 8 percent
  • Smarter Planet revenue up 20 percent
  • Middleware products (WebSphere, Information Management, Tivoli, Social Workforce Solutions and Rational products) up 3 percent
  • Operating systems revenues of $576 million down 2 percent
  • Revenues in the US were flat, up 1 percent in the Europe, Middle East and Africa region, down 4 percent in Asia/Pacific.

Looking Ahead 

So where does that leave IBM? Given that a lot of the problems outside the hardware division were caused by global problems, there is not a lot to be done except continue the way it has over the past quarter, something CEO Ginny Rometty seems to be set on doing anyway:

Where we had identified high growth opportunities and pursued them aggressively -- cloud, mobile, business analytics, and security -- we continued to show strong growth…We are taking action to improve execution in our growth markets unit and in the elements of our hardware businesses that are under performing.

Whether that means IBM will divest some of its units or more job cuts in the hardware division remains to be seen. This in only the first set of quarterly figures from an IT major, so it is difficult to tell what is going to happen. However, with more financial results on the way, a clearer picture of where the IT sector is at the moment should emerge soon.