IBM's Q3 2013 hardware sales tanked and revenues have missed analyst expectations for seven consecutive quarters. IBM blamed China. Is CEO Ginni Rometty on the hot seat?

The VAR Guy

October 17, 2013

2 Min Read
Is IBM CEO Ginni Rometty on the hot seat following seven quarters of missed revenue estimates
Is IBM CEO Ginni Rometty on the hot seat following seven quarters of missed revenue estimates?

It’s Deja Vu all over again: IBM today announced declining quarterly revenue, this time blaming weak server sales on China. Take a closer look and IBM’s server sales are tanking while the company attempts to accelerate a shift from Unix to Linux and cloud computing. Under CEO Ginni Rometty, IBM’s revenues have missed consensus estimates seven consecutive quarters. Here’s the fallout.

According to IBM’s SEC filing, Q3 2013 results included:

  • Total systems revenues decreased 19 percent (down 18 percent, adjusting for currency).

  • Revenues from Power Systems were down 38 percent compared with the 2012 period.

  • Revenues from System x were down 18 percent.

  • Revenues from System z mainframe server products increased 6 percent compared with the year-ago period.

  • Revenues from System Storage decreased 11 percent.

  • Revenues from Microelectronics OEM increased 1 percent.

During an earnings call with Wall Street analysts this evening, IBM executives more than two dozen times pointed to China as one of the main causes for the hardware sales slowdown. 

Noted CFO Mark Loughridge:

“Our performance at growth markets was driven about half by execution and half by a pause as China moves to the process to develop its new economic plans. China was down 22%. We experienced a slowdown in demand across the board, but most significantly in hardware, which was down about 40% and which makes up about 40% of our business in China.”

The Elephant in the Room

During the earnings call, Toni M. Sacconaghi, an analyst at Sanford C. Bernstein & Co. LLC, noted that IBM has “had six straight quarters where revenue growth has been negative. You’ve missed consensus revenue expectations for seven straight quarters.” He asked if something more significant was wrong at IBM.

Loughridge replied with a rambling 1,100-word statement that did little to address Wall Street’s concerns. CEO Ginni Rometty did not participate in the call. IBM shares fell 6 percent in after-hours trading.

IBM earlier this year tried to sell off its x86 server business and then furloughed employeeshad layoffs and cut retiree benefits amid the hardware sales challenges. 

Growing Cloud Momentum

Meanwhile, IBM pointed to growing cloud revenues, which exceeded $1 billion for the quarter. Roughly $460 million of that $1 billion involved cloud services and the rest apparently involved hardware and software sales. In The VAR Guy’s mind, that means only about $460 million was true cloud revenue — but that’s still an impressive figure, likely fueled by the recent SoftLayer acquisition.

The big question now: Are IBM’s hardware problems self-inflected, or are rivals like Cisco Systems, Dell, Hewlett-Packard and Oracle also seeing hardware weakness in China? So far, IBM’s the only company sounding such a loud alarm in China.

The VAR Guy still thinks cloud computing is the real source of IBM’s hardware challenges…

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