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IBM third quarter revenue down on soft global services demand

Ginni Rometty

Armonk: IBM this week reported a drop in third quarter revenues, on the back of soft services business around the world, and adverse currency movements.

  • Net income: GAAP: $3.8 billion, flat; $3.9 billion, up 3 percent excluding UK pension-related charges;
  • Revenue: $24.7 billion, down 5 percent, down 2 percent adjusting for currency; negative currency impact of nearly $1 billion
  • Services revenue down 5 percent, flat adjusting for currency
  • Growth markets revenue down 1 percent, up 4 percent adjusting for currency; BRIC countries up 4 percent, up 11 percent adjusting for currency
  • Business analytics revenue up 14 percent year to date

Third-quarter net income was $3.8 billion, flat year-to-year; or $3.9 billion, up 3 percent excluding the impact of UK pension-related charges. Operating (non-GAAP) net income was $4.2 billion compared with $4.0 billion in the third quarter of 2011, an increase of 5 percent.

Total revenues for the third quarter of 2012 of $24.7 billion were down 5 percent (down 2 percent, adjusting for currency) from the third quarter of 2011. Currency negatively impacted revenue growth by nearly $1 billion.

"In the third quarter, we continued to drive margin, profit and earnings growth through our focus on higher-value businesses, strategic growth initiatives and productivity," said Ginni Rometty, IBM chairman, president and chief executive officer.

"Looking ahead, we see good opportunity with a strong product lineup heading into this quarter and annuity businesses that provide a solid base of revenue, profit and cash. We are reiterating our full-year 2012 operating earnings per share expectation of at least $15.10."

Geographic Regions

The Americas' third-quarter revenues were $10.4 billion, a decrease of 4 percent (down 3 percent, adjusting for currency) from the 2011 period. Revenues from Europe/Middle East/Africa were $7.2 billion, down 9 percent (down 1 percent, adjusting for currency). Asia-Pacific revenues increased 1 percent (up 2 percent, adjusting for currency) to $6.5 billion. OEM revenues were $538 million, down 28 percent compared with the 2011 third quarter.

Growth Markets

Revenues from the company's growth markets decreased 1 percent (up 4 percent, adjusting for currency) and 35 countries had double-digit revenue growth, adjusting for currency. Revenues in the BRIC countries — Brazil, Russia, India and China — increased 4 percent (up 11 percent, adjusting for currency).

CFO Mark Loughridge commented, "Americas' revenue was down 3 percent, with declines in both the US and Canada.

"In North America, Software was up 4 percent, Services was down, and we had a double-digit decline in hardware. With revenue performance relatively consistent with last quarter, EMEA was stable. Looking at the performance by country, Germany and Spain grew; the UK was flat, while France and Italy declined.

"In our growth markets countries, which we refer to as GMU, the BRICs had another good quarter, combined they were up 11 percent. We had double-digit growth in Russia which was up 11 percent, India up 13 percent and China up 19 percent. Brazil however, was down 3 percent. Looking beyond the BRICs, Australia and Mexico were down double digits this quarter, while most of the other countries continued to do well. In fact, this quarter 35 of the growth markets countries grew at a double-digit rate, reflecting ongoing broad-based strength."

Services

Global Technology Services segment revenues decreased 4 percent (up 1 percent, adjusting for currency) to $9.9 billion. Global Business Services segment revenues were down 6 percent (down 3 percent, adjusting for currency) to $4.5 billion.

Pre-tax income from Global Technology Services was flat and pre-tax margin increased to 16.6 percent (up 9 percent and 18.1 percent, respectively, when adjusted for workforce rebalancing charges in the third quarters of 2011 and 2012). Global Business Services pre-tax income decreased 5 percent and pre-tax margin increased to 15.6 percent (up 9 percent and 18 percent, respectively, when adjusted for workforce rebalancing charges in the third quarters of 2011 and 2012).

Loughridge added, "Global Business Services, revenue was $4.5 billion, down 6 percent as reported, or down 3 percent at constant currency.

"Looking at revenue from a geographic perspective, the growth markets continued to drive the strongest performance. Japan returned to growth this quarter, with revenue up 2 percent at constant currency, while North America and Europe were both down 6 percent at constant currency.

Looking at the GBS business by offering, the growth initiatives continue to drive strong growth. We had solid double-digit growth in business analytics, Smarter Planet, and cloud. Together, these initiatives represent about one third of total GBS revenue. So, we continue to get great traction in these growth initiatives and we are seeing the benefits across IBM.

"Turning to profit, GBS pre-tax income declined 5 percent year to year."

Year-To-Date 2012 Results

Net income for the nine months ended September 30, 2012 was $10.8 billion, a year-to-year increase of 4 percent, or $10.9 billion, up 5 percent, excluding the impact of UK pension-related charges. Diluted earnings per share were $9.27 compared with $8.48 per diluted share for the 2011 period, an increase of 9 percent, or $9.38, up 11 percent excluding the impact of UK pension-related charges. Revenues for the nine-month period totaled $75.2 billion, a decrease of 3 percent (flat, adjusting for currency) compared with $77.4 billion for the nine months of 2011.

Operating (non-GAAP) net income for the nine months ended September 30, 2012 was $11.5 billion compared with $10.7 billion in the year-ago period, an increase of 7 percent. Operating (non-GAAP) diluted earnings per share were $9.90 compared with $8.77 per diluted share for the 2011 period, an increase of 13 percent.

IBM's full third quarter financial statement, and a presentation by Mark Loughridge are available here.

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