By Tess Stynes and 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. 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. Much of the drop resulted from
IBM's sale last year of its commodity server business.
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.
Meantime, IBM expects its hardware business to improve this year
as it refreshes its mainframe and Unix computer systems, but IBM is
facing a new generation of cloud-computing competitors. Analysts
expect it to continue to struggle this year in services and
software, UBS analyst Steven Milunovich said.
"Investors and users both see them on the wrong side of the
fence when it comes to disruption," Mr. Milunovich said.
Big Blue also has been pushing sales of its Watson software.
IBM's Watson data-mining technology has delivered high-profile
results, famously winning at "Jeopardy!" in 2011, but the path to
revenue has been slow.
IBM has unveiled several Watson-based efforts in recent months,
most recently a partnership with Apple Inc., Johnson & Johnson
and Medtronic Inc., to gather and analyze a flood of health-related
personal information. Known as Watson Health, the alliance
transfers IBM's experience in data processing to the health-care
field, part of an evolving strategy to pool and analyze data from
other companies, such as Twitter Inc. and the Weather Channel.
Overall, IBM reported a profit of $2.33 billion, down from $2.38
billion a year earlier. On a per-share basis, earnings rose to
$2.35 from $2.29 on fewer shares outstanding. Excluding
restructuring-related charges, retirement-related charges and other
items, per-share earnings from continuing operations rose to $2.91
from $2.68.
Analysts polled by Thomson Reuters expected per-share profit of
$2.80 and revenue of $19.64 billion.
Global technology segment revenue declined 11% to $7.9 billion,
but excluding divestitures and currency fell 1%.
Software segment revenue dropped 8% to $5.2 billion, but
excluding currency fluctuations declined 2%.
Global business services revenue decreased 13% to $4.3 billion,
but excluding divestitures and currency impacts fell 4%.
As of February, IBM expected currency to hurt revenue growth by
more than 7 percentage points, compared to the hit of 6 to 7
percentage points it projected in January. For the full year, IBM
is expecting a foreign-exchange impact of more than 6 points, more
than previous projections for an impact of 5 to 6 points.
Write to Tess Stynes at tess.stynes@wsj.com and Robert McMillan
at robert.mcmillan@wsj.com
Access Investor Kit for Apple, Inc.
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=US0378331005
Access Investor Kit for International Business Machines
Corp.
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=US4592001014
Access Investor Kit for Johnson & Johnson
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=US4781601046