IBM's Q2 better than expected; Hardware struggle continues

Like previous quarters, hardware remains a sore spot for IBM. However, the company delivered better than expected earnings and sales in the second quarter.
Written by Larry Dignan, Contributor

IBM delivered better-than-expected second quarter earnings, but remains a work in progress as only the company's software unit delivered any revenue growth.

The company reported second quarter earnings of $4.1 billion, or $4.12 a share, on revenue of $24.4 billion, down 2 percent from a year ago. Non-GAAP earnings were $4.32 a share.

Wall Street was looking for second quarter non-GAAP earnings of $4.29 a share on revenue of $24.13 billion.

The company on Monday rolled out a partnership with Apple to build industry applications on iOS. The deal, which could help IBM's mobile ambitions, would take multiple quarters to pay off.

In a statement, CEO Ginni Rometty said the company made more progress on its plans to focus on cloud, big data, security and mobile.

IBM stuck with its non-GAAP 2014 target of at least $18 a share, or $17 with charges.

By geography, IBM took a hit in Asia Pacific where revenue fell 9 percent in the second quarter. Americas revenue was off 1 percent with EMEA up 1 percent. Revenue in Brazil, Russia, India and China was down 2 percent. That tally indicates some stability relative to previous quarters. Growth market revenue fell 7 percent in the second quarter, said IBM.

IBM CFO Schroeter outlined the emerging market dynamics on the earnings conference call:

"Brazil grew over 20 percent year-to-year driven by large deals in the financial sector and India returned to growth. Revenue in China is down 11 percent effectively halving the rate of decline for the last couple of quarters. So this is a change in trajectory in China but we have not yet seen improvement in the other Asia-Pacific countries."

Other key points from Schroeter:

  • The mainframe "is a pretty cool infrastructure that drives still 70 percent of the world's enterprise data."
  • China's bounce back doesn't reflect on neighboring economies. Korean and Australia struggled in the quarter for IBM.
  • Software revenue is expected to pick up in the second half. IBM is juggling license revenue with a shift to subscriptions.

Like previous quarters, hardware remains a sore spot for IBM. Revenue from System z mainframes was off 1 percent in the second quarter, but Power Systems sales fell 28 percent. Storage revenue fell 12 percent, but flash systems revenue grew more than 100 percent.

Overall, IBM's hardware business reported operating income of $25 million---small change in Big Blue's business, but an improvement on a loss from a year ago.

Here's a look at IBM's quarter by the charts:

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