IBM disappointed with Q3 performance, divests low-performing business

BANGALORE, INDIA: IBM said it would divest semiconductor business, amidst dismal performance in the quarter ended in September. This was IBM’s 10th consecutive quarter of flat or declining sales as it reported the net income of $3.5 billion in in 3Q, a decrease of 17 percent from $4.1 billion in 3Q, 2013.

Total revenues from continuing operations for the quarter is $22.4 billion which is also down by 4 percent, while the net loss from discontinued operations is of $3.3 billion, which includes its OEM microelectronics semiconductor business that it will 'sell' to Global Foundries, as well as its customer care outsourcing business and x86 server manufacturing that it sold to Lenovo.

Hence, the company has decided to remix the portfolio by investing in higher value areas and making decisions on businesses that no longer support the high value strategy.

During a conference call on Q3 earnings, Ginni Rometty, IBM chairman, president and chief executive officer said: ''We just took a bold step in our transformation going fabless with the divestiture of our semiconductor manufacturing business. We have world-class technologist and intellectual property, but this is a capital intensive business, which has been challenging for us without scale. With future node progression and the potential transition to larger wafer sizes, the capital requirements will substantially increase. Global Foundries will acquire our Microelectronics business and will become the semiconductor technology provider for our future systems. This agreement leverages the strength of each company.”

The company is looking to reinvent the business by shifting focus on strategic growth areas – cloud, data and analytics, security, social and mobile, which paid off quite well. Cloud revenue is up more than 50 percent year-to-date, while cloud delivered as a service is up 80 percent. Business analytics revenue is up 8 percent, mobile revenue more than doubled and security revenue is up more than 20 percent year-to-date.

Speaking further on the direction that the company intends to move towards, she said: “'We're implementing changes that make it easier to consume our capabilities and innovations and increase our agility. We're creating vertically integrated units to address key growth areas. As we did with Watson earlier this year, we're creating a dedicated business unit for cloud and other integrated units to address growth areas like security and smarter commerce.''

The company will be taking additional actions to simplify the structure and accelerate productivity as well, said Rometty.

Though, IBM is investing heavily in software and services; but that did not help it much to offset the weakness in hardware and some parts of the software business. The revenue decline was mostly due to a sharp decline in the Systems and Technology business, although revenue also fell for Technology and Business Services and Software as well.

Global Services segment revenues decreased 3 percent to $13.7 billion. Global Technology Services segment revenues decreased 3 percent to $9.2 billion. Global Business Services segment revenues were down 2 percent to $4.5 billion.

Revenues from the Software segment are $5.7 billion, down 2 percent compared with 3Q, 2013.

Revenues from IBM’s key middleware products are $3.7 billion, 1 percent down from 3Q, 2013. Operating systems revenues of $513 million are down 11 percent.

Revenues from continuing operations from the Systems and Technology segment totaled $2.4 billion for the quarter, down 15 percent.

Revenues from Power Systems are down 12 percent. Revenues from System x are down 10 percent. Revenues from System z mainframe server products decreased 35 percent. Revenues from System Storage decreased 6 percent.

Global Financing segment revenues decreased 3 percent to $487 million.

The slowdown is evident across the geographies including growth markets: 2 percent in the Americas, 2 percent in EMEA, 9 percent in APAC and 7 percent in the BRIC countries.

“We are disappointed in our performance. We saw a marked slowdown in September in client buying behavior, and our results also point to the unprecedented pace of change in our industry,'' said Rometty.