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TheStreet Open House

IBM Matches Estimates as Cloud Revenue Soars

NEW YORK (TheStreet) -- IBM (IBM) on Wednesday reported lower first-quarter net income and a slide in revenue as a result of a one-time workforce rebalancing charge and a negative currency impact, as well as the usual hardware drag.

The company reported a 22% decline in operating net income to $2.6 billion, or $2.54 per share, and a 21% drop in GAAP net income to $2.4 billion, or $2.29 per share.

Analysts, on average, were expecting EPS of $2.54, according to Thomson One Analytics.

GAAP net income results included the impact of about $870 million in a workforce rebalancing charge and a nearly $100 million gain for the divested customer care outsourcing business.


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On both a non-GAAP and GAAP-basis, gross profit margin rose, up 47.6% or 90 basis points and up 46.9% or 130 basis points respectively. Another positive is IBM reported an uptick in its services backlog, up 1% to $138 billion.

Revenue was down 4% to $22.5 billion, and down 1% adjusting for currency effects and excluding the divested customer care outsourcing business. Analysts were expecting revenue of $22.9 billion. In total dollar amounts, currency effects negatively impacted overall revenue growth by about $350 million.

As with past quarters, Systems and Technology was the main drag on overall revenue, down 23% in the first quarter. In an effort to reduce the burdens there, the company announced the sale of its industry standard server business to Lenovo in January. When the x86 divestiture to Lenovo is completed later this year, IBM will have divested of more than $6 billion in annual revenue from low-margin businesses since 2012, the start of Ginni Rometty's tenure as CEO. This comes after the company divested of some $15 billion in low-margin businesses such as PCs, displays, printers during the prior decade.

The company says its the strategy to transform to higher value continues.

Rometty said in a statement that "we continued to take actions to transform parts of the business and to shift aggressively to our strategic growth areas including cloud, big data analytics, social, mobile and security. As we move through 2014, we will begin to see the benefits from these actions. Over the long term, they will position us to drive growth and higher value for our clients."

IBM's Software, Services and Global Financing businesses all grew during the quarter. Software was up 2%, Services was up 2%, and Global Financing was up 6%. Furthermore, the company's cloud revenue was up more than 50%. For cloud delivered as a service, the first-quarter annual run rate was $2.3 billion doubling year to year. Business analytics revenue rose 6%.

During the quarter, IBM announced investments of $1.2 billion to globally expand SofLayer cloud hubs, $1 billion to create cloud Platform for developers and $1 billion to create the Watson business unit.

The company is expecting full-year non-GAAP EPS of at least $18.

Shares were down 2.56% to $191.38 in afterhours trading.

-- Written by Andrea Tse in New York

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