For IBM, hardware news is bad news

Big Blue isn’t looking too perky after another disappointing quarter where hardware numbers, in particular, disappointed.

Forbes summed up IBM’s(s ibm) third quarter earnings report on Wednesday night thus:

Sales fell 4% to $23.7 billion, while Wall Street was looking for $24.8 billion, prompting CEO Ginni Rometty to admit “[we] fell short on revenue.”  IBM saw its software sales rise 1 percent to $5.8 billion before currency adjustment, while services declined 3 percent to $9.5 billion.  Hardware sales fell a dramatic 17 percent to $3.2 billion.

UBS analyst Steven Milunovich, who downgraded IBM shares to neutral wrote, that while software was “a bit light … hardware was the primary problem.” And hardware sales in China were a paramount concern.

He continued:

“The biggest issue this quarter was hardware sales in growth markets. At 25 percent of revenue, the 9 percent decline in growth markets is difficult to offset. Specifically, hardware sales in China almost halved, taking China revenue down 22 percent. A related issue is the almost $1bn decline year-to-date in hardware profit—servers and storage are under pressure, especially the high-margin Power line.”

To be fair, the hardware category has been a basket case for most server makers for some time now but IBM all by itself has seen a $1 billion decline year-to-date in hardware profit, according to UBS.

“Servers and storage are under pressure especially the high-margin Power line,” Milunovich wrote.

Update: Sanford Bernstein analyst Toni Sacconaghi concurred, writing in his note that IBM:

“has significant exposure to hardware, and uniquely to UNIX hardware, which is declining precipitously (-37% YoY at constant currency); second, IBM’s growth markets massively underperformed, most of which we believe is attributable to IBM specific/management issues.”

Hardware hell

Brand-name server makers — IBM, Hewlett Packard(s hpq), Oracle(s orcl) — have all been squeezed for more than a year as they face stiffer competition from makers of low-cost, no-name servers which are gaining traction in big webscale data centers.  Check out the most recent quarterly revenue and shipment numbers from Gartner(s it) if you need further evidence of this.

server revenue q3

server shipments Q3

IBM also faces scrutiny from the Securities & Exchange Commission which is looking into how the IT giant is accounting for “cloud” revenue and sales. Although to be fair, IBM won’t be the only legacy IT company that will face such questions.

For people paying attention, it’s no surprise that IBM is struggling in hardware. After all it looked into selling off its server business to Lenovo which already bought its PC and laptop business in 2005. The server talks apparently fell apart.

Right about now, IBM may be wishing that deal had gone through. IBM shares ended the day Thursday down 6.4 percent to $174.83 a share.

IBM Chart

IBM data by YCharts

This story was updated at 5:23 a.m. PDT with additional analyst comment from Sanford Bernstein.