IBM Plans Product Line Divestitures, Employee Cutbacks After Disappointing Q1

Get ready for some major changes at IBM.

Following first-quarter financial results that IBM executives acknowledged were "disappointing," CFO Mark Loughridge, in an earnings call with financial analysts Thursday, indicated that employee layoffs and divestiture of poorly performing businesses are planned for the current quarter.

For the first fiscal 2013 quarter ended March 31, IBM reported revenue of $23.4 billion, down 5 percent from $24.7 billion in last year's first quarter. Net income was $3.0 billion, down 1 percent from $3.1 billion one year earlier.

"There are parts of our business that are in transition or have been underperforming, like elements of our Power, [System] x and storage product lines that showed disappointing performance in the first quarter," Loughridge said. "Here we're going to take substantial actions," he said, without offering details.

[Related: IBM In Talks To Sell x86 Server Business To Lenovo ]

Thursday CRN reported that IBM is in active negotiations to sell its x86 server hardware business and Lenovo is the top candidate to buy it.

Asked about that report by an analyst, Loughridge said: "I'm obviously not going to comment on rumors."

But at several points during the earnings call the CFO referred to coming "divestitures" and made it clear that "workforce rebalancing," which is IBM-speak for layoffs, is planned for the current quarter. He said one-time charges for costs associated with those cutbacks will be taken against second-quarter results.

Last year, IBM spread out staff cutbacks throughout the year, Loughridge said. "But given our first-quarter performance, we now expect to take the bulk of our workforce balancing actions for the year in the second quarter." He said those cutbacks -- the company does not yet have a "specific approved action," he said -- and the resulting charges will have an impact on second-quarter earnings.

Loughridge blamed IBM's quarterly results on the company's inability to close a number of big contracts -- valued in total around $400 million -- for IBM software products and mainframe systems.

"This quarter certainly didn't close the way it started," the CFO said. "We had solid profit performance in January, but as the quarter ended hundreds of millions of dollars of very profitable software and System z mainframe deals fell short of the goal line. This impacted the first-quarter close. But the rollover of these deals positions us for a strong start in our software and mainframe business in the second quarter."

Loughridge blamed the problems on "a shortfall in sales execution in our software and mainframe businesses." He said the company had taken steps to improve that execution, but didn't offer details.

NEXT: Hardware Sales Slump While Software Sales Remain Flat

IBM took a big hit in hardware sales: Revenue from its Systems and Technology segment dropped more than 17 percent to $3.1 billion from $3.7 billion in the first quarter of last year. Systems and Technology reported a pre-tax loss of $0.3 billion.

Total systems sales were down 13 percent for the quarter. Hit hardest were sales of the company's Power Systems, which plunged 32 percent year-over-year. Revenue from System x sales were down 9 percent. And sales of storage systems decreased 11 percent.

"Weakness in Power, System x and storage resulted in overall declines," Loughridge said. "For Systems and Technology, this is not the quarter we expected."

Later in the call he said IBM would more aggressively expand its line of Power servers for the Linux market.

Loughridge said IBM has sold more than 4,000 units of the "PureSystems" servers it launched one year ago. But, he provided no revenue figures for those sales.

The only real bright spot in Systems and Technology was sales of IBM's System z mainframes. Despite the delayed contracts, revenue from mainframe sales grew 7 percent in the quarter, and the company said total delivery of System z computing power, measured in millions of instructions per second (MIPS) were up 27 percent.

Revenue from IBM's software business was flat year-over-year at $5.6 billion.

Sales of key products including WebSphere, Information Management, Tivoli, Social Workforce Solutions, formerly Lotus software, and Rational were $3.5 billion. WebSphere product sales were up 6 percent, Tivoli product sales grew 1 percent, and Social Workforce Solutions sales increased 8 percent.

But, Information Management product sales declined 2 percent in the quarter and Rational software sales dropped 2 percent. Operating systems revenue was down 2 percent to $578 million.

Loughridge also said the 1 percent increase in revenue from growth markets such as China and Russia was "disappointing." He said that growth should be in the mid-single digits. On the positive side, the CFO said revenue from cloud computing initiatives grew 70 percent in the quarter, while "smarter planet"-related sales were up 25 percent and business analytics sales grew 7 percent.

On the services side, IBM said revenue from the company's Global Technology Services was down 4 percent year-over-year to $9.6 billion. Global Business Services revenue was down 3 percent in the quarter to $4.5 billion. Loughridge said IBM's services businesses "performed as expected," and the company closed 22 service contracts each valued at $100 million or more.

Revenue from IBM Global Financing was up 2 percent to $499 million.

PUBLISHED APRIL 18, 2013