IBM Q1 Profit: It's All Software, Services


Revenue from IBM's Systems and Technology group, which includes server and storage hardware, was $3.2 billion in the quarter ended March 31, down 23 percent from $4.2 billion in the same period last year.

Altogether, IBM reported sales of $21.7 billion for the first quarter, down 11 percent from $24.5 billion in the same period one year earlier. Mark Loughridge, IBM's senior vice president and CFO, said in a conference call that currency fluctuations were partly to blame for the lower revenue numbers: Sales were down only 4 percent in constant currency.

Thanks to cost-cutting measures that helped boost profitability, including layoffs of an undisclosed number of employees during the quarter, net income was down just 1 percent to $2.30 billion from earnings of $2.32 billion one year ago.

IBM reported that sales of systems (computer hardware) overall were down 22 percent year over year during the first three months of the year. That included a 27 percent decrease in revenue from System x servers and a 2 percent decline in sales of the converged System p servers. While revenue from System z mainframes was down 19 percent, IBM said the amount of System z computing power (as measured in millions of instructions per second) was up 18 percent, reflecting purchases of fewer, larger systems by customers as they consolidate computer systems.

Sponsored post

Revenue from storage system hardware was down 20 percent from the first quarter of 2008.

"Effectively, all our pre-tax profit came from software, services and financing," Loughridge said. IBM continues to focus on higher-margin software products and services in such areas as business analytics, cloud computing and what IBM is calling its "Smarter Planet" infrastructure initiative, the CFO said during the conference call.

Calling the first three months of the year "a solid quarter," Loughridge said, "I think IBM performed well in this difficult environment."

Monday, Oracle and Sun announced that Oracle would buy Sun for $7.4 billion. The acquisition will make Oracle, for the first time, a major player in the market for computer server and storage system hardware. Earlier this month IBM and Sun had been in talks for IBM to acquire Sun, but the talks collapsed because IBM was reportedly reluctant to pay more than $7.0 billion.

Asked about the Oracle-Sun deal by a Wall Street analyst, Loughridge declined to comment on IBM's negotiations with Sun. But he said Oracle and Sun have been close partners for years and the fact the two are now merging doesn't really change the market dynamics.

Revenue from most of IBM's non-hardware businesses was down during the quarter, although some were flat or even showed some growth when currency fluctuations were taken into consideration. Total software sales of $4.5 billion were down 6 percent from $4.8 billion last year, for example, but that marked a 2 percent increase when calculated in constant currency.

Total Global Services revenue was down 10 percent (2 percent in constant currency) to $13.2 billion from $14.6 billion last year.

IBM had several rounds of employee layoffs in the first quarter, particularly in its services and software organizations, that are believed to have totaled somewhere between 5,000 and 10,000 workers.

The good news for IBM's remaining employees is that the worst may be over. Loughridge said the first quarter results included $265 million in restructuring expenses to cover the costs of layoffs -- what Loughridge called "workforce rebalancing." The CFO noted that's a big chunk of expected 2009 restructuring expenses, totaling between $300 million and $400 million, "since most of this is behind us," he said.