IBM's revenues continue their journey south

IBM's financial woes continue as the company reports down revenues for 2014 with its server hardware business leading the downward trend.

IBM's slow motion transition from the old computing world to the new continues as its revenues drop.

The company reported further declines in overall revenues and net income for fiscal 2014, once again led by its server hardware and, somewhat surprisingly, some of its core middleware software.

Revenues from the company's Power Systems continued to sag, falling 13% in the fourth quarter compared with the same quarter in 2013, while its System z mainframe server and system storage revenues slumped 26% and 8% respectively in the fourth quarter. Overall revenues from its software business in the fourth quarter fell to $7.6 billion, down 7% compared with the same period last year. Revenues from middleware products, including WebSphere, Information Management, Tivoli and Rational were $5.4 billion, down 6%.

Overall fourth quarter revenues were $24.1 billion, down 13% with the same period last year. Overall revenues for the year fell 5.6% to $92.8 billion from $98.3 billion in 2013, while net income dropped 27.3% to $12.0 billion.

Equally discouraging was the company's guidance for 2015. According to Martin Schroeter, IBM's CFO and senior vice president, the general performance for the software group is not expected to improve much over the 2014 results. IBM is betting its new System z13 mainframe can revive sales of its venerable server, but that won't become clear until much later this year after users conduct a thorough evaluation of the system. And while the backlog of its Global Services unit stabilized at $128 billion in 2014, there were no rosy projections for growth this year.

One must wonder if corporate users and Wall Street investors can be patient enough to wait until sometime in 2016 to see a reversal that sticks.

Some observers believe IBM would be better off  buying  its way into a new market as a way to improve its top line number, such as cyber security for instance, rather than trying to inch its way back by growing its own cloud and mobile products and services.

"To grow revenues they need to make an acquisition in a business market where they are not dominant, that gives them access to a new customer base and that they can build a new business on," said one long time IBM follower. "The problem is there is not a lot worth going after right now. Otherwise they are treading water through 2015 and into 2016."

IBM's cloud a rare bright spot

In one of the few bright spots,  revenues from IBM's strategic imperatives, which include sales of its cloud analytics, mobile, social and security products lines grew to $25 billion, Schroeter said. Strategic imperatives were up 16% in 2014 compared to 2013, and now account for 27% of IBM's overall revenues. The company's overall cloud business grew 60% to $7 billion in revenues with an annual run rate for the services portion of that number totaling $3.5 billion, up from $2.2 billion in 2013. Sales from its analytics products grew 7%.

Continuing its year-long focus on high-margin businesses, Schroeter said IBM will continue to shift its development spending to SoftLayer, Watson, Bluemix and its partnership with Apple.

Schroeter made special note of the Apple-IBM partnership formed last year, mentioning the company will follow the first 10 applications it delivered last November with more this quarter aimed at the Healthcare, Energy and Utiliies markets.

Revenues from the company's Systems and Technology Group (STG) were down 12% to $2.4 billion, adjusting for the divestiture of the company's System x business, which was sold to Lenovo last year, Schroeter said. He noted that in January 2013, STG has reported a $1.7 billion year-to-year profit decline for 2013 and said the company has not stabilized the profit levels on a go-forward basis.

Despite the poor performance of STG, which takes in the company's server hardware, chips, and related software products, IBM is heading that business in the right direction for a smaller-scale but more profitable and viable corporate business model in the long term, said Krista Macomber, a hardware analyst with TBR, Inc. in Hampton, NH, in a report following IBM's call with financial analysts.

Macomber added in her report that as IBM continues to invest in areas including cloud service delivery, "its corporate bottom line will continue to suffer during 2015."

The fourth quarter revenue decline in the company's middleware products has to do with the "continued cannibalization of traditional on premises licensing agreements due to subscription-based solution growth in new and existing cloud and hybrid cloud customer deployments," wrote Andrew Smith, a hardware analyst with TBR. In his report, Smith added the revenue declines of products such as WebSphere, Information Management and Tivoli, in parallel with the 16% growth of the products part of its strategic imperatives "illustrates the zero-sum nature of IBM's software portfolio transition."

Despite the revenue declines, one positive development for IBM is the gross margins on those middleware products remained at 90% and flat compared with the same quarter in 2013, Smith said in his report.

Fourth quarter revenues for IBM's Global Services unit also declined 8% to $13.5 billion, although when adjusted for the impact of the divested System x and customer care outsourcing businesses revenues were flat. The company's Global Technology Services unit also decreased 8% to $9.2 billion, although was up 2% when adjusted for the divested customers care and System x businesses. The overall estimated services backlog as of the end of December remained flat at $128 billion.

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I agree with you, Ed, as to whether IBM's new System z13 can reverse the downward trend in IBM's revenues. However, as I demonstrate in my recent post, http://goo.gl/zCCnyq, there are many reasons the z13 might be just what IBM needs. In addition to the 15 capabilities rolled out with the z13, it is encouraging that large institutions such as Citigroup have already gotten behind the z13. It is reasonable to expect that its competitors do the same. The z13 includes apps for developers to quickly roll-out new products, leveraging both the mainframe and cloud technologies. I believe IBM has a shot at succeeding. But like you, I agree that turning the rudder may take some time.
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I have to admit that I do not know much about the modern mainframe market and so can't pass judgement on the z13, however when you look at how many mainframes there are compared to midrange, you see just how crazy IBM's strategy to ditch pretty-much ditch AIX and i5 is. There is almost no proof that companies will pay more for Linux on Power and every customer I speak to just sees it as a risk when compared to Intel.
I agree IBM had to modernise and slim down, but I think they should have grown the Linux affinity and concentrated on running Linux in containers within AIX and i5 as they do with Z. Including tools such as Yum and lowering licence costs would have given customers a reason to stay on Power.
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