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IBM misses on Q3 earnings, revs; FY14 view cautious

International Business Machines Corp. (IBM) reported dismal results in the third quarter of 2014. Non-GAAP earnings (including acquisition and retirement related adjustments) of $3.68 per share missed the Zacks Consensus Estimate by 62 cents. Revenues of $22.4 billion also missed the the Zacks Consensus Estimate of $23.5 billion.

However, most importantly, IBM abandoned its 2015 roadmap earnings target of $20.00 per share. Share price declined 7.11% ($12.95) to $169.10 following the disappointing result and revised outlook.

Revenues

Revenues declined 4% (down 2% at cc) year over year, due to weaker-than expected software revenues in the quarter.

Segment Revenue Details

Global services revenues declined 2.7% year over year to $13.7 billion. This was primarily due to sluggish revenue growth across both Global Technology Services and Global Business Services segments.  

Global Technology Services (GTS) revenues declined 3% (down 2% at cc) year over year to $9.22 billion. On a year-over-year basis, GTS outsourcing revenues (including divested customer care business) declined 4% at cc., partially offset by 1% year-over-year growth in Integrated Technology services. Maintenance revenues declined 1% (down 1% at cc) from the year-ago quarter.

Global Business Services revenues declined 2.2% to $4.46 billion (down 1% in cc) in the quarter. Consulting & Systems Integration declined 1% on a year-over-year basis and remained flat in constant currency. GBS outsourcing revenues fell 7% (down 6% at cc) from the year-ago quarter.
 
Services backlog at the end of the third quarter declined 7% year over year (down 2% in cc) to $128 billion.

Revenues from the Software segment were $5.7 billion, down 2% compared with the year-ago quarter. Software-as-a-Service offerings were up nearly 50%.  Revenues from IBM’s key middleware products, which include WebSphere, Information Management, Tivoli, Workforce Solutions and Rational, were down 1% from the year-ago quarter. IBM’s mobile revenues more than doubled on a year-over-year basis.

Systems and Technology revenues were down 15% on a year-over-year basis to $2.4 billion in the reported quarter. IBM continued to face fundamental challenges related to Power Systems, storage and System x in the quarter. System x revenues were down 10% in the quarter while Storage hardware revenues were down 6%. Revenues from System z mainframe server products decreased 35% compared with the year-ago quarter.

IBM’s cloud revenues jumped 50% from the year-ago quarter. Cloud delivered as a service revenues increased 80% year over year in the third quarter. Business Analytics revenues increased 8% year over year, while security offerings grew more than 20% year over year during the quarter. The company expects to spend $1.0 billion on cloud-based software development through 2015.

IBM’s new initiatives that include the expansion of OpenPOWER ecosystem added a number of new members bringing the total to 60 at the end of the reported quarter. The company recently announced that it will invest $3 billion over the next five years on research and development of next generation chip technologies.

Global Financing revenues declined 3% on a year-over-year basis to $487 million in the reported quarter.

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