New York: For IBM, the challenge is to convert the future of technology into an opportunity rather than a threat.
The technology giant has taken big steps. It is investing in cloud computing and in software to help customers make sense of the flood of digital data. And this week, IBM announced a major move in mobile computing: an alliance with Apple to jointly develop smart software for the business market, delivered to iPhones and iPads.
But while the strategy looks promising, it has yet to pay off. The company’s revenue has been disappointing for more than a year, and investors are watching for signs of progress. IBM has managed to hit its profit targets largely through cutting costs and buying back shares.
The company’s second-quarter earnings, released Thursday, broadly fit that pattern.
IBM reported net income of $4.1 billion (Dh15 billion), a 28 per cent increase from the same quarter of last year. The company’s operating earnings per share rose 34 per cent to $4.32, higher than the average Wall Street analysts’ estimate of $4.29 a share, as compiled by Thomson Reuters. The percentage increase in earnings per share was greater than that of net income because there were fewer shares outstanding.
Revenue for the quarter fell 2 per cent to $24.4 billion. The decline was expected because of continuing weakness in IBM’s hardware business and the sale this year of a unit that had generated revenue of $300 million a quarter. The revenue figure was slightly higher than the Wall Street forecast of $24.1 billion.
IBM reported its results after the close of the stock market. In after-hours trading, its stock slipped around 2 per cent from the closing price of $192.49.
In a statement, Virginia M. Rometty, IBM’s chief executive, said the results showed “further progress on our transformation.”
The company’s technology services division reported revenue of $13.9 billion, a decline of 1 percent. And its software division — IBM’s most lucrative business — grew by 1 per cent to $6.5 billion.
Revenue in hardware fell 11 per cent to $3.3 billion. Sales of servers, which run the Unix operating system and are used in data centres, fell 28 per cent. In the mainframe market, IBM is not expected to have a new model until next year, and sales of the current offerings are shrinking. The company is selling off a unit that makes small, industry-standard servers to the Chinese company Lenovo for $2.3 billion.
The deal was announced in January, and the transaction, pending government review, is not expected to be completed until later this year. So that struggling unit will remain on IBM’s books until then.
The areas IBM is betting heavily on include data analytics, cloud computing and corporate mobile and social computing. At a meeting with analysts in May, company executives called them its “strategic imperatives.” They span IBM’s services, software and hardware businesses and mostly contribute to the revenue of the services and software units.
Steven Milunovich, an analyst at UBS, estimates that these businesses account for 21 percent of IBM’s revenue. But the new technologies, like cloud computing, also pose a threat to other parts of IBM. For example, software delivered remotely over the internet as a cloud service can replace traditional business software on corporate desktops and in data centres.
“There is sort of a tug of war going on inside IBM,” Milunovich said. “And the question is, can the company really grow in the new technologies and still keep a strong, steady business in the older technologies?”
IBM’s executive team recognises the difficulty of navigating that strategic transition. In an interview in May, Rometty acknowledged that this was a “rocky time.” But she said she was confident IBM was taking the necessary steps to ensure the company’s long-term health.
In Thursday afternoon’s conference call, Martin Schroeter, IBM’s chief financial officer, echoed that theme, pointing to the strong gains in data analytics and cloud and mobile computing — all areas that grew at double-digit levels in the first half of the year.
But looking at the lack of growth in IBM’s mainstay services and software businesses as a whole, analysts remain unconvinced. The defining challenge for all the big, established technology companies, says A.M. Sacconaghi, an analyst at Bernstein Research, is to move successfully from today’s technologies to tomorrow’s.
“IBM didn’t show from this report that they are going to make it to the other side comfortably,” Sacconaghi said.