Weak demand from China knocks out IBM revenue

Wednesday 22 January 2014 14.45
The world's biggest technology services company is facing weak demand
The world's biggest technology services company is facing weak demand

IBM Corporation missed revenue expectations for the fourth consecutive quarter as the world's biggest technology services company grappled with weakening demand for its servers and storage equipment.

As a result of the disappointing results, CEO Ginni Rometty and her team will forego their annual incentive payments for 2013.

IBM said its total revenues fell 2% to $99.8 billion for the year.

Total revenue for the quarter ended December 31 fell 5% to $27.7 billion, missing analysts expectation of $28.25 billion, according to Thomson Reuters.

Hardware revenue plunged 26%, leading to a $750m collapse in profit for that segment. 

IBM's results are certain to accelerate the company's restructuring.

"As we look forward to 2014, we will continue our transformation," Martin Schroeter, IBM's chief financial officer, said. "We will acquire key capabilities, we will divest businesses and we will rebalance our workforce as we continue to return value to shareholders."

IBM, which has been expanding its higher-margin services and software businesses over the last decade, is expected to relinquish more of its lower-margin hardware business. Revenue in that business, which includes server and storage products, fell for the ninth consecutive quarter as more companies switched to the cloud from traditional infrastructure.

Emerging market sales dropped by 6%, led by China, where IBM reported a 23% collapse in revenue. 

A backlash against US government spying in emerging economies and a move by Beijing to encourage state-owned companies to buy domestically-branded products contributed to plummeting demand, some analysts said. 

Asia-Pacific revenue fell 16%, while that from Brazil, Russia, India and China fell 14% in the quarter.

"China is going through a very significant economic set of reforms," Schroeter said on the earnings call. "While they have slowed, we don't think that this opportunity has gone away."

Schroeter said that revenue in the world's second-biggest economy, which accounts for about 5% of IBM's sales, will take several quarters to recover.

IBM's China difficulties, coupled with the company's ongoing weakness in hardware sales, may accelerate IBM's sale of the its low-end servers business to Lenovo Group, some analysts said.

IBM last night forecast that full-year 2014 adjusted profit would beat analysts' expectations and also affirmed its 2015 target for operating EPS of at least $20 per share.

"In view of the company's overall full-year results, my senior team and I have recommended that we forgo our personal annual incentive payments for 2013," CEO Rometty said. For 2013, her base pay was $1.5m and annual incentive payment target was $4m.

Revenue from IBM's system and technology unit, which includes servers and storage, fell 26.1% to $4.26 billion. Revenue from global technology services, its largest business, fell 3.6% to $9.92 billion.

Software revenue was the only bright spot. It grew by 2.8% to $8.14 billion in the quarter.
IBM and rivals such as Oracle and SAP are racing to meet surging demand for web-based software products, better known as cloud computing.

Moving to the cloud allows businesses to cut costs by getting rid of bulky servers for network-based software and using remote data centres run by technology companies.

The global cloud services market last year grew by almost a fifth to an estimated $131 billion, according to research firm Gartner. IBM Markets Intelligence estimates the market could be as big as $200 billion by 2020.

Net income for the fourth quarter rose to $6.2 billion, or $5.73 a share, from $5.8 billion, or $5.13 per share a year earlier. It got help though from a lower tax rate of 11.2% in the fourth quarter, down 14.3 points from a year ago.

On an adjusted basis, it earned $6.13 per share, above analysts' estimates of $5.99 per share.