IBM Sings Hardware Blues With Q1 Profit Slip

IBM's first-quarter results are down thanks to a drag in hardware sales for System X, POWER and Big Blue mainframe business unit. But that's to be expected, said Virginia Rometty, CEO of IBM, who spun the company's underwhelming earnings report Wednesday, saying it was the cost of transforming its business to a more profitable one focused on mobility, cloud and security lines of business.

First-quarter revenue for IBM fell 3.9 percent from a year earlier to $22.5 billion. Analysts had estimated $22.9 billion on average. IBM said it took an $870 million charge for layoffs and a gain of $100 million for the sale of its customer service outsourcing business to Synnex.

In a statement, Rometty said moves to "transform parts of the business" would pay off later in the year when she said IBM "will begin to see the benefits from these actions."

[Related: IBM Goes On Major x86 Server Offensive ]

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IBM has been taking aggressive steps to rid itself of businesses with lower profit margins. The company earlier this year said it will sell its x86 server business unit for $2.3 billion to Lenovo. Last September, IBM sold its customer care business to Synnex for $505 million. Meanwhile, it continues to invest in higher-margin lines of business.

IBM spent more than $1 billion to create a new group around its Watson technology. IBM also bought cloud provider SoftLayer in 2013 for $2 billion and this year committed an additional $1.2 billion to bolster its data centers around the world.

But those investments didn’t offset losses by IBM's hardware group in its first quarter. IBM's Systems and Technology group reported revenue of $2.4 billion, down 23 percent from the year prior. "This reflects both the product cycle of System z, and the secular challenges in POWER, Storage and System x," wrote IBM in a prepared statement.

System z revenue was down 40 percent, with MIPS down 19 percent year-over-year. Power revenue declined 21 percent at constant currency. Storage hardware revenue was down 23 percent, IBM reported. IBM believes that POWER and System z revenue will improve with the upcoming release of Power8 and a cyclical upturn in mainframe buying by enterprise businesses.

On the plus side, IBM said cloud revenue grew more than 50 percent last quarter, and cloud offerings delivered as a service now represent $2.3 billion in annual revenue.

"Just as importantly, we continue to take significant actions to move to these growth areas," said Martin Schroeter, IBM's senior vice president and CFO, Finance and Enterprise Transformation, in prepared remarks. "I talked about some of the targeted investments we're making, including SoftLayer capacity, BlueMix and Watson. We are focused on allocating our capital efficiently and effectively, which means investing in the right places, as well as moving away from areas that don't support our shift to higher value."