Software and services help buoy IBM Q2 revenue

Last night, IBM CFO, Mark Loughridge, talked analysts through Big Blue’s performance for the three months to the end of June. In all, the underlying indicators of the services business are positive. Total IBM revenue for Q2 was down 1% to $24.9bn, while net income was hit (down 17% to $3.2bn) by a $1bn “workforce rebalancing” charge.

Drilling down into the services numbers specifically, combined revenue from IBM’s two segments - Global Technology Services (GTS) and Global Business Services (GBS) – dipped 1% to $14bn. Pre-tax profit was down 17%, reflecting the impact of the workforce rebalancing charge. Take that charge out and services profit increased 2%, with the pre-tax margin expanding by just over a point.

During the period, IBM inked 15 deals worth over $100m, including a “megadeal “in Europe. Loughbridge highlighted that the performance of the UK business as a whole (i.e. not just services) “not only improved but grew”. By extrapolating the patterns at the corporate level, we think it is more than likely that services played a role in this. Last month IBM acquired SoftLayer (see Salesforce and IBM: $4bn on cloud acquisitions in one day) to continue the expansion of its public cloud infrastructure. Along with IBM’s own amalgamation of SmartCloud offerings, SoftLayer will form the base of a new Cloud Service division within IBM GTS.

GBS revenue was up 2% to $4.6bn, with the European business slowing its rate of decline over last quarter. The pre-tax margin expanded by half a point. Software revenue increased 5% to $6.4bn with adjusted pre-tax income up 6% to $2.7bn.

The GTS business declined 2% to $9.5bn, with the outsourcing business down 3%. IBM claims the bulk of this decline has been driven by the work it has been doing to restructure lower margin contracts. This programme is now almost finished, and IBM enters H2 with “the strongest backlog growth in years” - so we expect good things from the outsourcing business in the coming quarters! Excluding the workforce rebalancing charge, GTS pre-tax margin improved by 1.3 points based on improved efficiency and productivity as well as what Loughbridge calls “tough minded spend actions”.

In the past six months, IBM’s UK Strategic Outsourcing business has put additional effort into the business development process to build the pipeline for large IT outsourcing deals. However, it faces huge competitive pressure to close these deals as all of the IT outsourcing suppliers fight it out in a shrinking market. What’s more, the Indian firms have become a lot more aggressive in the infrastructure services market in the past 18 months and are targeting existing IBM contracts where they perceive there to be customer dissatisfaction. This will put undoubted pressure on some IBM accounts where it is the longstanding incumbent supplier.

Read our latest analysis on IBM in the context of the supplier landscape here: UK SITS Rankings 2013. 

Posted by Kate Hanaghan at '09:40' - Tagged: results   outsourcing   infrastructure