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IBM Reports Q4 Revenue Hit, Earnings Miss, But Annual Cloud Business Up 60 Percent

Currency fluctuations and the sale of its x86 server and business processing outsourcing businesses combined with other factors to give IBM a mixed fourth quarter.

photo
Martin Schroeter

IBM Tuesday reported fourth-quarter 2014 revenue drops across most segments of its business, and blamed two major divestitures for a large part of the drop.

At the same time, IBM, Armonk, N.Y., reported that profits fell only slightly, with currency fluctuations from what the company termed a "dramatic" strengthening of the value of the U.S. dollar being blamed for the slip.

And while IBM and analysts on the Tuesday quarterly financial analyst call dedicated little time to discussing IBM's recent restructuring, the company did highlight strong growth in its cloud business.

[Related: IBM Combines Hardware-Software Channels Into New Global Partner Group]

Investors were not happy with IBM's report. The company's after-hours share prices fell from a close of $157.01 to as low as $150.56 per share, but then recovered some to more than $154 a couple of hours after the close of market.

For its fourth-quarter 2014, which ended Dec. 31, IBM reported total revenue of $24.1 billion, down 11.9 percent from the $27.4 billion the company reported for the fourth quarter of 2013.

The company also reported fourth-quarter 2014 earnings of $5.5 billion, or $5.54 per share, on a GAAP basis, down from the $6.2 billion, or $5.76 per share, the company reported last year. On a non-GAAP basis, income in the fourth quarter of 2014 was $5.8 billion, or $5.81 per share, down from last year's $6.6 billion, or $6.16 per share.

For the full year 2014, IBM reported revenue of $92.8 billion, down 5.7 percent compared with last year's $98.4 billion. On a GAAP basis, the company reported earnings of $15.8 billion, or $11.97 per share, down from $16.9 billion, or $15.06 per share.

Martin Schroeter, IBM senior vice president and CFO, said during the company's fourth-quarter financial analyst call that revenue for the fourth quarter was in line with expectations excluding the impact of currency fluctuations and a couple of significant divestitures of IBM businesses.

"Our strategy is focused in the areas where we can make a continuous difference in IT, and our results show the progress we have made," Schroeter said.

During 2014, IBM closed deals to sell its System x x86-based server business to Lenovo, its BPO (business process outsourcing) business to Synnex, and its microelectronics business to Globalfoundries. Schroeter said that while those businesses generated total annual revenue of $7 billion, they collectively produced an annual loss of about $500 million.

NEXT: IBM's Results On A Business-By-Business Basis


The company, on the other hand, saw strong growth in its cloud and analytics businesses. Cloud revenue during the year reached about $7 billion, up 60 percent over last year. The company's as-a-service business had a $3.5 billion annual run rate, up from $2.5 billion in 2013, he said. Meanwhile, analytics revenue rose 27 percent, he said.

IBM's Americas revenue was $11.1 billion for all of 2014, down 9 percent over the previous year, or down 4 percent when currency fluctuations and the sales of the System x and BPO businesses were taken into account, Schroeter said.

Fourth-quarter 2014 revenue for IBM's Global Technology Services business was reported as $9.2 billion, down 7.6 percent from the $10.0 billion it reported in the fourth quarter of 2013. Global Business Services revenue in the fourth quarter of 2014 fell about 8.4 percent over last year to $4.3 billion.

Schroeter said the backlog in the fourth quarter was flat year over year, an improvement from the third quarter of 2014 when backlogs slipped 2 percent. The quarter was highlighted by IBM's release of its first 10 mobile solutions made in conjunction with a deal the company signed with Apple.

IBM's software revenue in the fourth quarter of 2014 fell 6.9 percent over last year to $7.6 billion. While IBM faced software headwinds thanks to the System x and BPO divestitures, the company reported double-digit growth in security software revenue, Schroeter said. IBM also doubled the number of mobile software offerings and said its SaaS offerings rose 50 percent in the quarter.

Revenue for IBM's Systems and Technology business fell 39 percent over last year to about $2.4 billion, in large part due to the sale of its System x business to Lenovo.

The company's System z mainframe business fell 26 percent during the quarter compared with last year, or 23 percent on a constant currency basis, Schroeter said. However, the quarter was the 10th quarter in the current product cycle, and IBM expects its mainframe business to increase with the release last week of its new z13 mobile-centric mainframe.

IBM's Power-based server revenue fell 11 percent during the quarter over last year, which Schroeter called a modest improvement over the third quarter. During the fourth quarter, IBM unveiled several Power8-based servers. The company also formed the OpenPower Foundation as a way to open-source its Power-based architecture, he said.

NEXT: More Details During Q&A


IBM's storage business fell 8 percent in the fourth quarter, or 5 percent on a constant currency basis, Schroeter said. However, the company saw a big uptick in sales of flash storage that helped mitigate the fall in OEM and disk-based storage sales, he said.

Global Financing revenue at $532 million slipped 0.5 percent compared with last year's figure.

During the question-and-answer period of the call, Schroeter said in response to a question about IBM's recent restructuring that the company will continue to adjust skills in 2015 as needed. "But we will not be restructuring at the same level as last year," he said.

When asked about IBM's acquisition strategy, Schroeter said the company's approach of complementing existing businesses and building skills works well. "[It's] been built around our view of the future of IT," he said.

Investors can expect IBM to make more acquisitions in the as-a-service business than in on-premise business, Schroeter said. "We have a lot of opportunity," he said. "We don't have a lot of business in this space today."

However, Schroeter also said, IBM is more active than ever in partnering with leading companies such as Apple and Twitter. "We don't have to own all the technology to bring it to clients," he said.

PUBLISHED JAN. 21, 2015

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