International Business Machines Reports a Mixed Q2
International Business Machines reported second-quarter results on Monday night. It was a mixed bag with strong earnings but soft sales, and Big Blue followed up by simply reaffirming its previous guidance for the full fiscal year. IBM shares fell on the news, closing 6.1% lower on Tuesday.
In the second quarter, revenues fell 13% year over year to land at $20.8 billion. That was about 1% below the analyst consensus of $21 billion. On the bottom line, IBM delivered adjusted earnings of $3.84 per share, again 13% below the year-ago period. Here, analysts were looking for $3.78 per share.
The picture changes a little bit in the light of currency exchange effects and IBM's recent sale of the System X server business to Chinese peer Lenovo. On an apples-to-apples basis, backing out these unique events that aren't related to IBM's core business, revenues fell a much milder 1% year over year.
The geographic breakdown provides a useful analysis of these adjustments. Sales fell 8% in the Americas region, but only 2% when backing out currency and System X effects. In Asia-Pacific, the reported 19% revenue drop becomes a 1% swoon under the adjusted light. And in the Europe/Middle East/Africa segment, a 17% drop becomes a 1% rise instead.
It's not all sunshine and lemon drops, of course. The BRIC bloc of Brazil, Russia, India, and China, which is seen as a high-growth opportunity by IBM and many other American companies, saw a 35% revenue plunge. Even after backing out the System X and currency events, organic sales to the BRIC markets still fell 18%.
In terms of business segments, business and technology services declined 11% year over year and software sales decreased 10%. The hardware business, which made up 12.5% of IBM's sales in the year-ago quarter, shrank by 32%. Now, that division represents just 9.6% of Big Blue's revenues.
Data from IBM's SEC filings.
If the loss of System X sales seems drastic, keep in mind that the product line wasn't particularly profitable. One-third of IBM's hardware business is gone (again, also including currency effects and general business performance), but gross profits for that segment only declined by 17%. Working through operating costs as well, pre-tax operating income actually rose 26% in the hardware segment while services and software incomes declined significantly.
Meanwhile, IBM's "strategic imperatives" increased sales significantly. Cloud computing revenues rose more than 70%, backing out the currency and System X sale again. On the same basis, business analytics grew more than 20%. Mobile services sales quadrupled while social revenues jumped 30% higher, both year to date.
"Our results for the first half of 2015 demonstrate that we continue to transform our business to higher value and return value to shareholders," said IBM chairman and CEO Ginni Rometty in a press statement. "We expanded margins, continued to innovate across our portfolio and delivered strong growth in our strategic imperatives of cloud, analytics and engagement, which are becoming a significant part of our business."
That about sums it up: IBM is reshaping its business mix in a big way.
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Anders Bylund owns shares of International Business Machines. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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