The tech giant, International Business Machines (IBM, Financial), is slated to announce its Q4 earnings on January 20 and currently the company is being followed by several analysts after it posted fall in revenue in the third quarter of the fiscal year 2014. All eyes are set at the software division of IBM, which is the chief contributor to its total revenue and is presently under the scanner due to presence of certain headwinds that’s leading to the loss in the software division. Let’s quickly look into the facts which could be probably shared by the management at the earnings call.
Looking back into the past
In the third quarter the company reported a slowdown in its business majorly due to weak client spending and an anaemic demand in the software segment. This resulted in a 4% year-over-year decline in revenue to $22.39 billion for the quarter, and 17% drop in net income to $3.5 billion.
The core software business exhibited a 1.6% decline in revenue to $5.7 billion, while the global technology services segment registered a decline of 2.9% y-o-y on a constant currency basis to $9.21 billion. Though there was growth seen in the cloud business analytics and big data, the global businesses revenue was dragged down 2.2% to $4.49 billion in the quarter.
Unfortunately, the challenging environment which IBM faced before reporting the third quarter earnings are still here to stay and thus the fourth quarter might not be very different in the number mix. However, this is the maximum that is being expected by analysts speculating on the company’s financials for the fourth quarter.
Software division might see the slightest revival
In the third quarter, the software business made up 25% of the total revenue for IBM. Geographically, IBM saw 45% of software business coming from the U.S. and around 32% from Europe, Middle East and Africa. Though the software division showed decline in revenue in the third quarter, the branded middleware does have a strong market penetration and could report better growth in the fourth quarter.
Also as the enterprise software demand remains healthy, it could boost the demand for the middleware software of IBM. Since it serves the booming markets of mobile phones and social platform tools, the software division might show impressive growth in the fourth quarter for the tech company.
Global technology services to show further decline
Global technology services has been showing a decline over the past few quarters and this trend is likely to continue as a result of contract restructuring and a decline in outsourcing backlog. Furthermore, the sale of the customer care division in 2013 has accentuated this decline in revenue and weak discretionary IT spending from clients is negatively impacting outsourcing revenues.
Global business services to benefit from cloud business
In the global business services domain, IBM is confident on its cloud business. IBM’s Vice President of cloud-computing, Angel Luiz Diaz stated – “We have had a really good year. We would call it a breakthrough year in cloud…”
However, headwinds such as pricing pressure and client renegotiations are likely to continue in the quarter and could deter growth in revenue to a limited extent. In the past year, IBM has increased its cloud data centers to 49 worldwide. Also it has entered into a partnership with Equinox intending to open 12 new cloud locations. With such key offerings in a variety of locations, IBM looks inclined to achieve long-term success.
Final thoughts
Prior to the earnings release, IBM seems to be an attractive investment option as rated by several analysts worldwide. This earnings release will throw further light on the advancements the tech behemoth is making in the business analytics domain and how it’s trying to revive its software and global technology services division in the upcoming quarters. So, let’s stay tuned till the actual numbers are announced from the company’s corner.
