Hardware woes dog Big Blue

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Despite becoming a smaller proportion of the business, declining hardware sales impact results for IBM

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Billy

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18 October 2013 | 0

Not many people know this but I once held the dubious distinction of having written more stories about IBM in one given quarter back in the early 1990s than any other journalist in Europe (I wouldn’t have known either if an IBM PR man hadn’t seen fit to tell me). While it’s fair to say that my IBM-related output since those far off days has dwindled almost to the point of extinction, the recent announcement of IBM’s Q3 results has given me an opportunity to start to redress that situation.

The headline figures show IBM made a profit of $4.4 billion (up 6%) but that revenue declined by 4% to $23.7 billion. Among other highlights, the company revealed it had reached $1 billion in cloud revenues (with $460 million delivered as a cloud service). But the hardware operation struggled, with sales down nearly 17% (despite a 6% increase in mainframe sales). In services, revenue at the Global Technology Services segment fell 4% to $9.5 billion and Global Business Services sales were flat at $4.6 billion. Software sales rose 1% to $5.8 billion.

Considerable emphasis has been placed on the poor performance of the hardware business, even though it is smaller than the other segments with revenue of $3.2 billion, equivalent to 13.5% of IBM’s total sales. The unit’s loss of $167 million certainly affected IBM’s overall profit figure but the effects were hardly earth-shattering. However, it is fair to say the 16% sales decline had a much wider impact, accounting for 63% of the company’s overall 4% decline in revenue.

The Q3 figures are not an isolated incident, but part of a trend. In the second quarter, hardware sales were down 12%, accounting for 58% of the 3.3% decline in IBM’s overall sales. In the first quarter, hardware sales fell by 17% and accounted for just over 50% of the 5.1% drop in overall company sales. The worrying thing is that the trend is going upwards compared to 2012.

Not that things were rosy for hardware last year either. The hardware business reported sales declines in every quarter but their effect on the overall fall in company sales was not quite as pronounced (48% in Q2, 42% in Q3 and 33% in Q4). In Q1, hardware sales were down 6.7% (or $270 million), dwarfing the overall increase in company sales of 0.3% ($66 million).

Commenting on the 2013 third quarter results, IBM senior vice president and CFO, Mark Loughridge, chose to focus on China as one of the main factors in the hardware sales decline. Sales in the country were down 22%, he revealed, with IBM experiencing “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”. IBM did not expect demand in China to pick up until after the first quarter of 2014, Loughridge added.

While there is no doubting the effects of the sales decline in China, you do have to wonder if this risks obscuring the bigger picture. The overall trend for IBM’s hardware operation is of a business experiencing a continual long-term sales decline. In and of itself, that would not necessarily be a bad thing. The problem for IBM is that despite the declining influence of its hardware business in terms of size compared to the company overall, it is having a pronounced effect on the overall sales performance. Even worse, that effect is becoming increasingly negative even as the size of the hardware business diminishes.

In other words, declining sales are reducing the size of the hardware business but, as they fall, they are having an undermining effect on IBM’s overall sales performance that is out of all proportion to the size of the hardware business. It will be interesting to see whether this trend persists and, if it does, what IBM plans to do about it.


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