Q4 earnings: IBM reports revenue decline across core business units
Published January 21, 2015
IBM’s financial woes continue as the tech giant enters 2015 with further declining revenue numbers. Its fourth-quarter 2014 earnings report is a bleak one, as Big Blue looks to the New Year as one of transformation and minimal gains, but the year is not without some shining moments.
The previous year was challenging for the company as it pushed its emerging businesses, such as cloud and Watson. In 2014, IBM launched its cloud platform-as-as-service, Bluemix; its cloud marketplace; released Watson for the enterprise; and in the second half of the year celebrated partnerships with Apple and Twitter and entered into a hefty cloud deal with SAP.
But these areas haven’t grown at the speed IBM needs to balance the drop in other areas of the business. This week IBM announced its Q4 earnings of $5.5 billion, a decrease of 11 percent from the prior year, on revenue of $24.1 billion, down 12 percent. Operating (non-GAAP) net income was $5.8 billion, compared with $6.6 billion in the fourth-quarter of 2013, a decrease of 13 percent. Earnings per share fell 4 percent from last year, to $5.54, and operating (non-GAAP) diluted earnings were $5.81 per share, a decrease of 6 percent.
On the software side, revenues were $7.6 billion, down 7 percent (down 3 percent, adjusting for currency) compared with the fourth quarter of 2013. Software pre-tax income decreased 11 percent, and pre-tax margin decreased to 44.7 percent. Pre-tax income and margin include the impact of the fourth-quarter workforce rebalancing charge.
IBM reports that revenues from its key middleware products, which include WebSphere, Information Management, Tivoli, Workforce Solutions, and Rational products, were $5.4 billion, down 6 percent (down 3 percent, adjusting for currency) versus the fourth-quarter of 2013. Operating systems revenues of $557 million were down 19 percent (down 16 percent, adjusting for currency) compared with the prior-year quarter.
The numbers are also down for 2014 as a whole: IBM reported earnings of $15.8 billion, or $15.59 a share, on revenue of $92.8 billion. In the last year, IBM divested in three areas: customer care outsourcing, System x, and semi-conductor manufacturing.
“We are making significant progress in our transformation, continuing to shift IBM’s business to higher value, and investing and positioning ourselves for the longer term," says Ginni Rometty, IBM Chairman, President and Chief Executive Officer, in a release. "In 2014, we repositioned our hardware portfolio for higher value, maintained a services backlog of $128 billion and achieved strong revenue growth across cloud, analytics, mobile, social, and security.”
Martin Schroeter, IBM Senior Vice President and Chief Financial Officer, reported that these strategic imperatives grew 16 percent in 2014 and generated $25 billion in revenue, which is 27 percent of IBM’s overall business.
“Our strategy is focused on leading in the areas were we see the most value in enterprise IT,” he notes during a quarterly earnings conference call this week. “We made tremendous progress in repositioning the portfolio and making investments to shift into these areas.”
IBM focuses on key growth areas
He reports that analytics ended the year up 7 percent, and IBM’s cloud business saw a 60 percent increase and is now up to $7 billion in revenue. Over the last year, IBM invested handsomely in Bluemix and continued to grow its SolfLayer services by expanding data centers around the globe. Big Blue also announced cloud application innovations around Watson analytics and IBM Verse, launched POWER 8, and established the Open Power Consortium. Not to mention IBM’s new partnerships: with Apple for enterprise mobility, with Twitter for big data, and with Tencent to deliver SaaS in China.
Softlayer continues to attract customers. In October 2014, it was announced that SAP selected IBM to be its global cloud provider for SAP's enterprise cloud solution. Big Blue also continued to invest through expansion of its data center footprint. In fourth quarter, IBM opened cloud centers in Melbourne, Paris, Mexico City, Tokyo, and Frankfurt.
Software security is another growing area, which has seen double digit growth for the ninth consecutive quarter. Mobile offerings have also increased with IBM MobileFirst and the launch of 10 enterprise applications built through the Apple partnership in the second half of 2014. In systems technology, IBM is similarly looking toward the future: Big Blue announced its z13 mainframe just last week, a culmination of a $1 billion investments and five years of development.
“We got a lot done in 2014 that positions us for the longer term,” says Schroeter. He notes that IBM will continue to invest in areas to accelerate growth, continue to optimize delivery platforms through workforce rebalancing and broader use of automation, and divest businesses that impact year-to-year results. “Total revenue will not grow in 2015 … while IBM always has gains, we won’t replicate the $1.6 billion of gains in 2014. That will be a net impact to a profit.”
Earnings by the numbers (fourth quarter revenue)
Global Technology services—$9.2 billion, an 8 percent decrease
Global Business Services—$4.3 billion, an 8 percent decrease
Software—$7.6 billion, a 7 percent decrease
Systems and Technology—$2.4 billion, a 39 percent decrease
Global Financing—$532 million, flat (up 5 percent, adjusting for currency)
Click for more details about IBM’s fourth-quarter 2014 earnings report.