IBM profits jump, but revenue is off 2 percent

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 to invest in newer fields like helping customers find insights in today's flood of digital data and in so-called cloud computing. And just this week, IBM announced a major move in mobile computing — a landmark alliance with Apple to jointly develop smart software for the business market, delivered to iPhones and iPads.

But while the strategy looks promising, the payoff is not yet evident. The company's revenue has been disappointing for more than a year, and investors keep watching for signals of progress or slippage. IBM has hit its profit targets, though, helped by cost cutting and share buybacks.

The company's second quarter broadly fit that same pattern.

IBM on Thursday reported net income of $4.1 billion, a 28 percent increase from the year-earlier quarter. The company's operating earnings per share rose 34 percent, to $4.32 a share, ahead of the average estimate of Wall Street analysts of $4.29 a share, as compiled by Thomson Reuters. The percentage increase in earnings per share was greater than in net income because there were fewer shares outstanding.


Revenue for the quarter fell 2 percent, to $24.4 billion. A decline was anticipated partly because of a cyclical downturn in its mainframe business, with no new offerings, and the sale earlier this year of a services unit that had generated revenue of $300 million a quarter. The second-quarter revenue came in slightly ahead of the Wall Street forecast of $24.1 billion.

IBM employs an estimated 2,700 at its facility in northwest Rochester.

IBM reported its results after the close of the stock market Thursday. In after-hours trading, its stock price slipped more than 1 percent 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 big technology services business reported revenue of $13.9 billion, a decline of 1 percent. And IBM's software division, its most lucrative business, grew by 1 percent, to $6.5 billion.

Revenue in hardware fell 11 percent, to $3.3 billion. IBM is not expected to have a new mainframe model until next year, so this year sales of the current offerings are trailing off. And the company is selling off its unit that makes small, industry-standard server computers, used in data centers, to Lenovo of China, for $2.3 billion.

The deal was announced in January, and the transaction, pending government reviews, is not expected to be completed till later this year. So that struggling business remains on IBM's books until then.

The businesses IBM is betting heavily on include data analytics, cloud computing, and mobile and social computing in corporations. 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 services and software.


Steven Milunovich, an analyst at UBS, estimates that these newer businesses now account for 21 percent of IBM's revenue. But the new businesses, like cloud computing, 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 centers.

"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?'"

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