IBM Reports Q2 Sales Decline, Profit Growth

IBM reported a 3 percent decline in second-quarter revenue as hardware and service revenue fell and software sales were flat.

But, IBM executives pointed to solid growth in net income, up 6 percent, gross profit margins, up 1.2 points to 47.6 percent, and free cash, up 9 percent to $3.7 billion, during the quarter as evidence the company is on track.

"We run this business for profit and cash contribution," said CFO Mark Loughridge during a conference call with analysts. "I think the results demonstrate the strength and resiliency of IBM's business model, delivering profit and cash on a sustained basis. Despite currency headwinds and a tough pipeline comparison, we delivered strong performance."

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In the second quarter ended June 30, IBM reported total sales of $25.8 billion, down more than 3 percent from $26.7 billion in the second quarter of fiscal 2011. Net income was $3.9 billion, up 6 percent from $3.7 billion in the same period one year earlier

Currency fluctuations impacted IBM's revenue growth by almost 4 percentage points or $1 billion, the CFO said.

Revenue from Systems and Technology, IBM's hardware operations, was down 9 percent in the quarter to $4.3 billion. Sales of Power Systems servers declined 7 percent, System x server sales were down 8 percent and storage system sales dropped 4 percent.

"Our hardware sales declined, as you would expect at this point in our product cycle," Loughridge said. "We continued our success in competitive displacements in the second quarter, with over 320 displacements that [drove] over $265 million in business. These came from a combination of HP and Oracle-Sun [installations]."

He also cited the PureSystems converged infrastructure line of systems that IBM introduced earlier this year as a future growth driver. But, he did not disclose any sales numbers to-date for those products.

Total software sales of $6.2 billion were flat compared with last year's second quarter. Loughridge said the quarterly comparison was tough because software sales grew significantly in the year-ago period. Sales of WebSphere products grew 3 percent in the quarter, and Tivoli software sales were up 2 percent. But, information management software sales were down 1 percent, Rational product sales dropped 7 percent and Lotus software sales plunged 8 percent.

NEXT: Loughridge Cites Growth In Key Segments

In services, revenue generated by Global Technology Services was $10.0 billion, down 2 percent, while revenue from Global Business Services dropped 4 percent to $4.7 billion.

IBM's Loughridge cited growth in key segments such as business analytics products and service, up 13 percent in the first half of 2012, "smarter planet" products and services, up more than 20 percent in the first half, and cloud computing-related revenue, which doubled year-over-year in the first six months of the year. Sales in what IBM calls "emerging markets," countries such as India and Brazil, were up 2 percent in the quarter.

"So we're getting real performance from the investments we're making in our growth initiatives," Loughridge said.

"An important element of our long-term model is to expand margins through a combination of productivity and [shift] to higher margin businesses," Loughridge said. In the second quarter, what the CFO called "workforce rebalancing" -- employee cutbacks, primarily in Europe -- added $150 million in one-time expenses. He said cutbacks would continue in the second half of this year, almost all outside of the U.S.