IBM posts flat revenue, falling hardware sales

Revenue from the System Z mainframe group dropped 25 percent, but the company's profit grew

While IBM continues to financially excel at selling software and systems, its hardware revenue for the past three months has been sluggish, according to the latest quarterly results posted by IBM on Tuesday. The hardware results didn't help the company's overall revenue, which was flat for the quarter.

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For the first quarter of 2012, IBM reported virtually no revenue growth from a year earlier, though the company posted solid gains in both net income and earnings per share. IBM reported revenue of US$24.7 billion, 0.3 percent above the $24.6 billion reported for last year's first quarter. Net income was $3.1 billion, up 7 percent from the $2.9 billion a year earlier. Earnings were $2.61 per share, a 13 percent improvement from $2.31 per share in the first quarter of 2011.

Software provided a solid increase in revenue during the quarter. IBM generated $5.6 billion for the quarter from software, an increase of 5 percent. Sales of IBM middleware -- such as the company's WebSphere, Tivoli, Lotus and Rational products -- were particularly strong, accounting for $3.5 billion in sales, an increase of 7 percent.

IBM's hardware sales did not fare as well. Revenue from the Systems and Technology division totalled $3.7 billion for the quarter, down 7 percent. Revenue from System z mainframe server products dropped by 25 percent, while revenue from Power systems and System x systems was flat from a year earlier.

The services divisions delivered mixed results. The Global Technology Services segment generated $10 billion in revenue, an increase of 2 percent from a year earlier. The Global Business Services segment generated $4.6 billion, down 2 percent.

Emerging markets continue to provide growth for the company. Collectively, the revenue for Brazil, Russia, India and China increased 10 percent for the quarter, while the Americas saw an increase in revenue of only 1 percent from the same time in 2011. Asia-Pacific revenue increased 4 percent.

The company's initiatives in emerging technology areas continue to do well. Business analytics revenue grew by 14 percent. Revenue from Smarter Planet systems, software and services grew by more than 25 percent, and cloud computing revenue doubled in the first quarter. IBM does not disclose dollar amounts for emerging technology revenue.

IBM had expected the dip in hardware spending, given a heavy surge of hardware sales in the first quarter a year earlier, said Mark Loughridge, IBM chief financial officer, in a conference call discussing the results.

Loughridge pointed to a recent IBM launch of a new set of integrated systems, called PureSystems, that the company expects to start boosting hardware sales as soon as the second half of this year.

Analysts did not seem to be overly concerned about the dip in hardware sales. It did fall short of Gartner's expectations, which were recently revised downward, Gartner analyst Chris Ambrose said. IBM's bigger challenge is maintaining growth in its services division, given the continued weakness in the global economy, Ambrose said.

"Overall, the hardware numbers are disappointing, particularly the flat performance of the System x and Power Systems groups, and the significant revenue ... declines in System z," said Charles King, principal analyst at Pund-IT. "However, you could argue that the overall positive results from IBM software helped to balance out those disappointments and also spotlighted the importance of the software investments the company has made over the past half-decade."

IBM's aggressive pursuit of the growth markets will also help offset sluggish hardware sales, King added.

In the first quarter, IBM's revenue roughly met analysts' forecasts, but profit fell short. The company's earnings of $2.61 per share missed the $2.65-per-share consensus forecast from analysts polled by Thomson Reuters. In after-hours trading late on Tuesday, IBM's shares were down $4.58 at $202.87.

As a result of the first-quarter performance, IBM has revised upward its expectations for full-year earnings, to at least $14.27 per share from its former estimate of at least $14.16.

The past few months have been busy ones for the company.

Last week, the company announced it had acquired Varicent software for its sales analysis tools. Earlier in the year, it acquired Emptoris for its supply chain analysis software and Green Hat for its software testing tools.

The company is also in the process of selling its retail POS (Point-of-Sale) business to Toshiba, for $850 million. This move will allow IBM to concentrate on providing the software for the systems, which Toshiba will build.

Joab Jackson covers enterprise software and general technology breaking news for The IDG News Service. Follow Joab on Twitter at @Joab_Jackson. Joab's e-mail address is Joab_Jackson@idg.com

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