IBM's Chinese hardware sales plunge; can the company return to growth?

|By:, SA News Editor

IBM's Chinese sales fell 22% Y/Y in Q3 and its hardware sales within the country dove 40%, management disclosed on the CC. The latter accounted for 5% of the 9% revenue drop seen for "growth markets" during Q3. A demand rebound isn't expected until after Q1 2014, as local firms wait for economic reform plans to be announced.

Talking about growth market weakness in general, IBM admits only half of its challenges stem from business conditions; the rest are execution-related.

"We see a pattern...," said Bernstein's Toni Sacconaghi in a pointed question. With IBM having seen six straight quarters of revenue declines, Sacconaghi wonders if Big Blue should model for 0% rev. growth going forward. Management gave a list of reasons why a return to growth was possible, including a healthy services backlog (+6% Y/Y in Q3 exc. forex).

Power systems (UNIX server) sales plunged 38% Y/Y in Q3, worse than Q2's 25%. System x (x86 servers) fell 18%, storage hardware 11%. System z (mainframes) rose 6%, aided by an upgrade cycle. Chips +1%.

One bright spot: cloud-related revenue topped $1B, with $460M coming from cloud services (a chunk of which likely comes from SoftLayer).

Q3 free cash flow (exc. financing receivables) was $2.2B, down $900M Y/Y and well below net income of $4.4B. IBM ended the quarter with $12.3B in cash/investments and $10.3B in non-global financing debt.

IBM now -5.9% AH. Q3 results, guidance/details.