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Big Blue inches past analyst expectations in Q2 2014, but at what cost?

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IBM revenues have overall declined, year on year, for the ninth quarter in a row as the company struggles to adjust to a cruel world increasingly led by lower-cost competitors.

The venerable tech company reported second quarter of 2014 financials on Thursday. Revenues for the period were $24.4bn, down two per cent on the $24.92bn it reported a year ago. Earnings-per-share were $4.32, up 34 percent on a year ago. This compares with analyst expectations of revenues of $24.13bn and an EPS of $4.29. Gross GAAP profits were $4.1bn, up 28 per cent.

"In the second quarter, we made further progress on our transformation. We performed well in our strategic imperatives around cloud, big data and analytics, security and mobile," said IBM chairman, president and chief executive officer Ginni Rometty, in its earnings release.

"We will continue to extend and leverage our unique strengths to address the emerging trends in enterprise IT and transform our business, positioning ourselves for growth over the long term."

When you delve into the performance of IBM's actual divisions, the sheen comes off a bit.

Global Technology Services revenues were $9.4bn, down 1 per cent year on year, and Global Business Services revenues were $4.5bn, down two per cent. Services signups were down 33 per cent for the first half of the year, compared to a year ago, which is worrying given the importance of that division to IBM's revenues. Software was up 1 per cent to $6.5bn.

The company's Systems and Technology hardware division dragged down results with its revenue of $3.3bn down 11 per cent year over year. Revenue from Power Systems – servers based on IBM's own POWER chips – fell a gut-wrenching 28 per cent, while storage fell 12 per cent, System X fell 3 per cent and System Z 1 per cent.

However, IBM said in its earning release that "strategic growth initiatives" were growing quickly, with cloud revenue up over 50 per cent in the year-to-date, and its various "as-a-service" technologies now logging an annual run rate of $2.8bn. Mobile revenue was up "more than 100 per cent year-to-date", it said without disclosing any actual revenue figures.

Along with the new initiatives, IBM has also been on a firing spree as it seeks to increase profitability for Wall Street. IBM started a "slaughter" of its Indian and European workforce in February of this year.

The company has also continued on its path to please its shareholders by cutting costs elsewhere. "The company returned $4.8 billion to shareholders through $1.1 billion in dividends and $3.7 billion of gross share repurchases," it said.

During the quarter, IBM spent $909m on capital expenditures, down slightly compared to $939m a year ago, which does not line up particularly well with its recent ambitious claims of data center build-outs for its SoftLayer cloud. Google, by comparison, blew $2.65bn on capital expenditures in its most recent financial quarter.

One dim ray of light in IBM's future, though, is its plan to invest $3bn in research and development over the next five years to develop new processors and new materials to make processors out of. During a call discussing the earnings, Big Blue executives stressed that this investment shows IBM is planning to still be an innovative company in the long-term.

But judging by these results it still needs to perform some surgery on itself first. IBM's shares were down 1.97 per cent in after-market trading. ®

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