By Robert McMillan
For most of its 104-year history, International Business
Machines Corp.'s lifeblood has been business hardware: cheese
slicers and card punches in the early days, mainframe computers and
microchips of late. As hardware sales have shrunk, though, the
company has bet its future on software and services--a strategy
that has yet to bear fruit.
Hardware sales continued their slide in the first quarter as IBM
exited the commodity server business and focused instead on its
more profitable Unix and mainframe computers. IBM reported Monday
that sales at its hardware group totaled $1.7 billion for the first
quarter of 2015--down from $2.4 billion during the same period last
year. Most of the drop came from IBM's sale last year of its
commodity server business to Lenovo Group Ltd.
Revenue dropped to $19.59 billion from $22.24 billion as a
surging U.S. dollar compounded the impact of shrinking hardware
sales. It was the company's 12th straight quarter of year-on-year
declines. Revenue was flat from a year earlier excluding currency
changes and divested businesses.
IBM plans to spend $4 billion this year on software and services
delivered in the cloud. Last year these nascent businesses
accounted for $25 billion, or 27% of annual revenue. IBM hopes they
will grow to $40 billion, or 40% of revenue by 2018.
Martin Schroeter, the company's chief financial officer was
optimistic during a conference call, saying the company's
"strategic imperatives" grew by more than 30% during the quarter.
"I'd say we had a pretty strong start to the year," he said on a
conference call with reporters Monday. Investors agreed, buoying
the stock price 3.4% in after-hours trading.
Although the quarter's hardware sales numbers were low, they
reflected a healthier server business, Mr. Schroeter said in an
interview Monday. Discounting the revenue drop from the company's
commodity server exit and currency fluctuations, IBM's hardware
business grew 30% during the quarter, thanks to a refresh of its
mainframe computer line, which doubled its sales. "What we have
left now is the high-value stuff," he said.
IBM will lose out on a small amount of operating-system revenue
now that the company is out of the commodity server business, but
Mr. Schroeter doesn't expect the shift to have a big effect on
software sales. It will, however, lower service margins. IBM is now
effectively Lenovo's subcontractor on this low-end server business,
"so we have a bit of margin compression," he said.
With many of the fastest-growing tech businesses either shifting
their data-center operations to cloud providers or purchasing
low-cost servers from upstart rivals such Quanta Inc. and Wistron
Corp., IBM is scrambling to reinvent itself, much as it did in the
1990s, when it began to emphasize software and services. It sold
off its PC business a decade ago, unloaded its commodity server
business, and agreed last fall to pay Globalfoundries Inc. $1.5
billion to take over its semiconductor-manufacturing business. That
deal is expected to close by year's end.
Today, the company is reorganizing itself around cloud
computing, the internet of things, and business analytics largely
under its Watson brand. In recent months, IBM has announced
ambitious partnerships with Apple Inc., Twitter Inc., and The
Weather Channel. This month, the company introduced a partnership
with Johnson & Johnson, Medtronic PLC, and several hospitals to
pool and distribute healthcare data and analysis. It is too early
to say how these initiatives will affect IBM's bottom line.
"I think it's a step in the right direction," said Daniel Ives,
an analyst with FBR & Co. "We continue to see a modest IT
spending environment, but companies like IBM, Microsoft, as well as
Cisco are continuing to search for innovative ways to get to the
cloud."
Corporate buyers are "moving away from traditional services and
traditional hardware toward some of these next generation areas of
spending, and that's a headway for some of these traditional
stalwarts such as IBM," Mr. Ives said.
Overall, IBM reported a profit of $2.33 billion, or $2.35 a
share, up from $2.38 billion, or $2.29 a share, a year earlier.
Excluding certain costs and discontinued operations, IBM's
per-share earnings rose to $2.91 from $2.68 and profit was $2.9
billion, compared with $2.8 billion in the year-ago quarter.
--Tess Stynes contributed to this article.
Write to Robert McMillan at robert.mcmillan@wsj.com
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