IBM servers' woes continue, cloud services show promise

IBM's once mighty server hardware business continues to struggle. Big Blue bets on software and cloud services business to bring some relief.

IBM's financial reports are beginning to feel like the old Top 40 radio tagline: the hits just keep on coming.

It is concerning but I suspect like many times before, the expectation of new releases and their timing may cause folks to delay any decisions.
Nigel Fortlagevice president of information technology and social business leader, GHY International

In results for this year's first quarter, IBM once again reported disappointing overall revenues of $22.5 billion, down 4% compared with last year's first quarter -- the lowest revenue total for Big Blue in five years.

"It is concerning but I suspect like many times before, the expectation of new releases and their timing may cause folks to delay any decisions," said Nigel Fortlage, vice president of information technology and social business leader for GHY International, based in Winnipeg, Manitoba.

"For us, that typically has been a three-year cycle and now it is a five-year cycle. So if they keep releasing every 18-24 months, they will go through at least two fiscal years before I would purchase again," Fortlage said.

Net income for the quarter was $2.6 billion compared with $3.4 billion in last year's first quarter, a drop of 22%. The results include a charge of $870 million for "workforce balancing," a euphemism for layoffs, carried out during the quarter.

Leading the hit parade once again was IBM's hardware business, which plummeted another 23% to $2.4 billion for the quarter. System z mainframe revenues decreased 40% compared to a year ago with MIPS, a more telling indicator of performance, down 19%. Of greater concern are the continued falling fortunes of the Power servers, which dove another 22%. The Intel-based System x IBM servers, which is being sold to Lenovo for $2.3 billion, were down 18%.

IBM officials once again said they are taking corrective actions to address the issues facing its Power series, Intel-based servers and storage businesses.

"We are repositioning Power and strengthening the ecosystem around OpenPOWER and we have taken actions across both Power and storage to right-size the business to the market dynamics," said Martin Schroeter, IBM's CFO, during last week's analyst call. He noted that System z performance in both revenue growth and margin is a reflection of being six quarters into the product cycle.

In addition to strengthening the OpenPower consortium, which includes Google, Schroeter added that the new Power 8 processor could boost Power series sales. That chip is the first built specifically to handle heavy workloads involving cloud computing and big data, Schroeter claimed. He added that the company will also expand its Linux capabilities through the Power 8 launch expected later this year.

"The rest of 2014 will continue to be challenging [for the Power series], but we could end up with a smaller but more profitable business," Schroeter said.

IBM cloud service gains counterbalance hardware losses

The one bright spot was IBM software, which saw revenues bump up 2% to $5.7 billion. The company's middleware products grew 5%, and were led by sales of Websphere, which jumped 12%, fueled by a number of application server and mobile technologies, according to Schroeter, who added that IBM's mobile business doubled over last year's results and that the company now has over 3,000 internal mobile experts.

The company's cloud revenues grew by some 50% achieving a first quarter annual run rate of $2.3 billion, or twice that of last year. IBM hopes to maintain that momentum by spending $1.2 billion to expand its global cloud footprint doubling its SoftLayer data centers to 40, spread over 15 countries.

The further investment in cloud services represents IBM's overall effort to transition to "key growth areas and transforming parts of the business," Schroeter said. He also noted the launch of BlueMix, a new platform as a service (PaaS), to speed deployment of hybrid clouds, as well as the $300 million recently spent to acquire Cloudant and Aspera, Inc. as additional examples of its commitment to branch into growth markets.

While IBM's cloud related results have improved, the company's competitive situation in that market may not be as rosy as those numbers make it appear.

In her analysis of the numbers, TBR analyst Jennifer Hamel wrote that the company's cloud products are cannibalizing IBM's legacy hardware business and IBM is trying to hold onto these hardware users by offering its own cloud products. However, the cloud market is "highly competitive with Amazon and Microsoft having significant footholds," she wrote.

"IBM notes that cloud-as-a-service revenue doubled year-over-year, which seems like a great accomplishment," Hamel wrote. "However, growing off a very small base can lead to significant percentage gains. Cloud as a service has a run rate of only $2.3 billion, which will account for about 2.5% of IBM's 2014 revenue. The risk to IBM's legacy business far outweighs the small gains it is making in cloud services."

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