IBM’s Systems Biz Returns To Profitability In Q2

July 22, 2013 Timothy Prickett Morgan

Big Blue had a tough first quarter, but things got a little bit better in the second three months of 2013 and the company’s top brass are feeling pretty good about the prospects for business in the second half of this year. This is the picture that IBM is painting despite some rough currency fluctuations that do not play in its favor and continuing difficulties in the RISC/Unix and X86 server segments. And there is tough competition in the storage business, too.

In the quarter ended in June, IBM once again did not grow its revenues and once again focused, as it unceasingly does, on the bottom line. Revenues declined by 3.3 percent to $24.94 billion, and thanks to a $1 billion charge relating to the thousands of layoffs that hit in the second quarter, net income was off by 16.9 percent to $3.23 billion. That worked out to $2.91 in earnings per share, down 12.9 percent from the year ago period, including current operating as well as divested businesses in the before and after numbers. IBM’s Retail Store Systems business, which it sold to Toshibalast year and which was profitable, makes it a slightly tougher compare. But if you ignore the effect of that divestiture on earnings per share, then it was more like $3.22 per share in the second quarter (down only 8 percent) and if you ignore the “workforce rebalancing” then it was more like $3.91 per share (up 8 percent).

Isn’t money math fun?

The good news as far as IBM server customers are concerned is that the company’s System and Technology Group returned to profitability on an operating basis in the second quarter after getting whacked in the first quarter. Mainframe sales were up 10 percent and Power Systems sales were only down 25 percent, a lot better than the 32 percent decline in the first quarter. This helped make STG profitable. Sort of.

STG’s sales to the outside world came to $3.76 billion in the second quarter, a drop of 11.8 percent compared to the year-ago period. The systems group sold another $135 million in stuff to other IBM groups, and that gave STG just under $3.9 billion in sales. If it had not been for the layoff charges, STG would have had a pre-tax income of $62 million, but $203 million of the charges hit the STG middle line and it therefore booked a pre-tax loss of $141 million. Loughridge nonetheless characterized this as a profitable quarter for STG, and said it would be profitable for the remaining two quarters of the year based on IBM’s sales plan.

The System x business probably did not help the pre-tax income much, but that is just a guess. (If it were not true, then IBM would not be trying to sell its System x biz to Lenovo Group.) What Loughridge did say was that System x sales (which include BladeCenters and presumably any x86-based PureFlex and PureSystems modular servers) were off 11 percent.

Disk and tape storage sales were off 7 percent in Q2 to $789 million, and IBM didn’t offer much in the way of discussion of why or where. IBM’s OEM chip sales were up 6 percent to $451 million, and all told, servers accounted for $2.52 billion in sales, down 10.4 percent. (IBM doesn’t provide revenue figures for its server lines individually, as it should.)

Software Group continues to be the profit engine at IBM, and it is helpful to remember that IBM’s software sales are closely tied to its systems sales. So don’t think for a minute that selling off the X86 server business to anyone will not have an effect on both Software Group and Global Services. Anyway, Software Group had sales of $6.42 billion to the outside world, up 4.1 percent and with a still impressive 88.8 percent gross margins. Software Group booked another $738 million in sales to other IBM units, which embedded those soft wares into other products and services, and had a pre-tax income of $2.44 billion. Those charges for layoffs hit that pre-tax income by $219 million. Software Group took its layoff hits in the quarter. By brand, WebSphere was up 10 percent, database products (what IBM calls Information Management) was up 5 percent, and Rational development tools were up 12 percent. The Tivoli security and systems management products saw a 13 percent jump, thanks to storage software and security software bumps of 17 and 20 percent, respectively. The Lotus software unit is now called Social Workforce Solutions with the addition of the Kenexa talent management suite that IBM acquired recently. And thanks to that acquisition, this software division had a 22 percent spike in Q2. These five “key branded middleware” segments together accounted for $4.3 billion in revenues in the June quarter, with operating systems generating another $578 million and other middleware (stuff for z/OS, z/VM, z/VSE, and IBM i mostly) bringing in a little over $1 billion.

The backlog at Global Services is on the rise, and that has IBM feeling chipper about the future even with Global Services having a 3.6 percent decline to $14.14 billion in the quarter. The services backlog was up 3 percent to $141 billion in the second quarter, the best growth IBM has seen in its services order book in four years.