IBM's software business just grew 1% in Q2: Why is it worrisome?

International Business Machines Corp’s software business grew less than expected in the second quarter, sparking a selloff in the company’s stock on Thursday, even as its revenue beat forecasts.

The company’s software business revenue grew 1 percent in the quarter to $6.5 billion, slower than forecasts of 3 percent, as it signed fewer contracts than expected.
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“We expect acceleration of software revenue to mid-single digits in second half of 2014,” IBM Chief Financial Officer Martin Schroeter said on a conference call after the results were released.

IBM, the world’s largest technology company, has been attempting to restructure its business to focus on high-end products like Cloud, mobile security and Big Data. The company estimates that software will bring in half of its profits by 2015.

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“This just isn’t a growth story anymore, it hasn’t been for a little while,” said Scott Kessler an analyst at S&P Capital.

“Software is a big business no question, but 1 percent growth in what many have thought of as their key growth driver is worrisome,” he said.

IBM shares slid 1.9 percent in after-hours trading to $188.89 after closing at $192.49.

In January, IBM sold its customer care business, which brought in approximately $1.2 billion in full year revenue in 2013, to hardware distributor Synnex Corp, a sale the company expects to negatively affect revenue comparisons by $300 million per quarter.

Last quarter, the company saw a $870 million restructuring fee, which was largely completed and contributed to savings quarter over quarter.

IBM reported free cash flow of $3 billion and buybacks of $3.7 billion, down from $8.2 billion last quarter.

The company also saw growth in its strategic sectors as business analytics was up 7 percent, cloud revenue grew 50 percent, and security revenue rose 20 percent.

Revenue in the Americas fell 1 percent, while revenue dropped 9 percent in Asia Pacific.

Overall, revenue fell 2 percent to $24.4 billion in the second quarter, above analysts’ average estimate of $24.1 billion.

Net profit rose to $4.1 billion, or $4.12 per share, from $3.2 billion, or $2.91 per share, a year earlier.

On an adjusted basis, the company earned $4.32 per share, beating analysts’ average estimate of $4.29, according to Thomson Reuters I/B/E/S.

Hardware revenue fell 11 percent to $3.3 billion, the seventh double-digit decline in the past eight quarters.

Reuters