Even IBM Can’t Evade Listless IT Economy as Revenue, Earnings Slide

IBM (NYSE: IBM) has a well-earned reputation for deftly sidestepping the sluggish worldwide economy, drawing on higher margin software and services business to tip-toe past flagging IT sales elswhere. But not this time. For its Q1 2013, the vendor recorded disappointing revenue of $23.4 billion, down 5 percent from last year, and a 1 percent slide in net income to $3 billion or $3 per share.

Wall Street analysts expected revenues of $24.7 billion and per-share earnings of $3.04 for the quarter. IBM blamed a failure to close some software and mainframe business during the quarter as the culprit. While software sales remained flat, services revenue toppled 4 percent, undoubtedly constrained by a 1 percent uptick in contract backlogs to $141 billion. During the quarter, the vendor landed 22 services deals of more than $100 million.

“In the first quarter, we grew operating net income, earnings per share and expanded operating margins but we did not achieve all of our goals in the period,” said Ginni Rometty, IBM chairman, president and chief executive officer. “Despite a solid start and good client demand we did not close a number of software and mainframe transactions that have moved into the second quarter,” she said.

As an IT industry bellwether, IBM repeatedly has said that it wants to post noticeable jumps in profits by 2015 even against an unreliable global economy. The path the vendor has articulated to get there—concentrating on business analytics, its Smarter Planet initiative and cloud computing—paid off handsomely during the quarter, as those business units saw growth of 7 percent, 25 percent and 70 percent, respectively.

On the other hand, sales from IBM’s old line systems and technology group at $3.1 billion fell 17 percent in the period. While System z mainframe server revenue increased 7 percent compared with the same period last year, Power Systems sales fell 32 percent, System x dipped 9 percent and System Storage revenue declined by 11 percent.

Growth markets, another focal point IBM believes will bring stronger sales, underperformed during the quarter, sliding 1 percent overall. The vendor specifically pointed to a 1 percent dip in revenue from the combined markets of Brazil, Russia, India and China.

It will be interesting to see if IBM can close the software and mainframe deals in Q2 2013 it says it could not complete in this most recent quarter. Rometty pledged that the vendor would do so and reaffirmed the company’s intention to meet FY 2013 per share earnings expectations.

“Looking ahead, in addition to closing those transactions, we expect to benefit from investments we are making in our growth initiatives and from the actions we are taking to improve under-performing parts of the business,” she said. “We remain confident in this model of continuous transformation and in our ability to deliver our full-year 2013 operating earnings per share expectation of at least $16.70.”

Separately, Reuters reported that IBM is considering laying off up to 17 percent of its workforce in France in the next two years, about 1,400 of the 8,000 people employed there, according to three trade-union representatives.

"Management is set to present a plan to cut between 1,200 and 1,400 staff over the next two years," Pierry Poquet, secretary general of the UNSA union is quoted as saying in the report. "For now it is only a target…we've heard such announcements before but they don't always come to pass."