International Business Machines (IBM) Q2 2014 Results – Earnings Call Transcript

GTS pre-tax profit was up significantly in the quarter. The profit performance was driven by several key factors: first, we’re continuing to make investments in key growth areas such as mobility, security, and cloud. These investments result in a differentiated set of capabilities that complement our clients’ systems of record, and are a good example of how we continue to evolve our core franchises.

Second, profit reflects the gain from the completion of several country closings in the customer care divestiture, partially offset by the profit lost from the divested business. Finally, we have the benefit from the past rebalancing actions. The year-to-year growth also reflects the absence of workforce rebalancing charges compared to last year.

Turning to Global Business services, revenue of $4.5 billion was down 2%. Consulting and Systems Integration grew 1% and flat at constant currency. We had strong double-digit growth in our practices that address the digital front office, particularly in cloud, analytics and mobile.

This was offset by declines in our traditional packaged application implementations. As our Digital Front Office offerings become a larger part of the portfolio, they will contribute more meaningfully to topline performance.

Two days ago, we announced a strategic partnership with Apple to deliver a new class of enterprise ready, MobileFirst business applications for iOS. With this partnership, IBM’s consultants and other client-facing specialists will help expand mobile device productivity, enabling big data and analytics at the point of contact.

Application outsourcing was down 9%, in line with last quarter’s results. Our performance continues to reflect pricing pressure and client contract renegotiations as well as a reduction in elective projects. GBS pre-tax profit grew 34% year-to-year, and reflects both year-to-year benefit in workforce rebalancing charges and the impact of lower revenue on a relatively fixed cost base.

Software revenue of $6.5 billion was up 1% and flat at constant currency. Middleware grew 3%, and within that the branded middleware was flat at constant currency on a tough compare from last year.

We had good growth in several of our strategic areas, cloud, big data and analytics, mobile and security. Across our software brands, Software-as-a-Service offerings are growing very quickly. This quarter our SaaS offerings grew by nearly 40%.

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Looking at our results by brand. WebSphere had another good quarter, up 5% at constant currency, led by app server, commerce and mobile solutions. Both on-premise and SaaS offerings contributed to WebSphere growth, with the majority of WebSphere growth coming from on-premise solutions.

Our Application Server business delivered strong growth, with an increase in demand for on-premise software that was driven by mobile and analytics workloads. We continue to have strong growth in MobileFirst, leveraging over 5,000 mobile experts and our expanding capabilities. Supporting our partnership with Apple, our software group will develop unique enterprise cloud services, native for iOS, to deliver the full enterprise-class mobile experience from analytics to cloud storage and data security.

Information Management software was down 2% at constant currency. Once again, relational database grew, though some product areas in the brand faced tough compares.

Tivoli revenue was up 3% at constant currency, driven by security software. This is the 11th consecutive quarter of growth in security software, with most of those quarters up double-digits. That’s also every quarter since we acquired Q1Labs and built our security division around that acquisition, supplemented by additional analytics capabilities. Workforce Solutions declined 8% at constant currency, as we transition from on-premise Notes, to our SaaS offerings.

Across software, we are transitioning our portfolio to capture growth areas, and we continue to drive innovation in our core franchises. We’re growing and building capabilities in emerging areas like Software-as-a-Service, mobile and security and also in more traditional areas such as application server and relational database, as new growth areas drive the need for on-premise capabilities. This quarter we faced a difficult compare, we expect our revenue growth to accelerate in the second half.

Systems and Technology revenue of $3.3 billion was down 11%. This is a significant improvement in the year-to-year performance compared to last quarter. The improvement was driven by System z as well as sequential improvements in System x and Storage. This, together with actions to align our structure to the demand profile, resulted in progress in stabilizing our profit.

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Looking at our results by brand, System z revenue was down 1% on flat MIPS, which is significant performance in the seventh quarter following the product announcement. In the quarter, we had large deals in the financial sector in China, the United States and Brazil. When you compare this cycle to date versus the prior cycle, we have shipped 25% more MIPS, and the STG revenue and gross profit are each about 98% of the previous cycle, net of currency.

The System z platform is one of our core franchises benefitting from IT trends. The value proposition for z becomes stronger as the scale of data and transactions grow as well as the need for security of that data and those transactions.

Power revenue declined 28%. The year-to-year performance reflects fundamental changes in the business, and as we have talked about in past calls, we have taken actions to align our structure to the demand profile, while investing to address where we see opportunity in the future.

First, we launched entry-level or scale-out POWER8 in June, and had a good start compared to previous cycles. Keep in mind that entry-level is a small portion of the Power business. POWER8 will be introduced into the mid-range and high-end segments over the remainder of the year.

And second, we expanded our OpenPOWER consortium, doubling the number of alliance members in the second quarter. At the end of June, we had 36 members across 10 countries, including nine in China, so globally diverse. The membership is across the stack, from chip designers to hardware component OEMs, to system vendors to middleware and software providers.

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