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Is IBM Server Business Sale To Lenovo On Hold?

During its second quarter 2013 financial conference call, IBM said that a large divestiture project, which likely referred to an expected sale of part of its ailing server business to China-based Lenovo, would likely not happen this year
IBM on Wednesday talked about the potential negative impact of a large divestiture project on its full-year 2013, making it unlikely to happen soon and leaving unsaid whether or not the divestiture was the long-expected sale of its server business.

IBM, as part of its second quarter 2013 financial report, said in its report that it has updated its full-year earnings per share expectations to at least $16.25 per share, which includes a net impact of $0.45 driven by the elongated discussions for its larger divestiture project.

IBM said that a substantial second-half gain it was expecting would not likely be achieved, a likely reference to disappointing talks between the company and Lenovo over a potential sale of IBM's server business.

During the IBM conference call discussing the second-quarter results and full-year expectations, Mark Loughridge, Senior Vice President and CFO , Finance and Enterprise Transformation, IBM, referred a couple of times to that divestiture project without providing any details as to what the company was divesting itself of.

The divestiture project could likely be the long-expected sale of at least a part of IBM's server business to China-based Lenovo.

While IBM has declined to comment on whether it is indeed in discussions to sell its server business, Yang Yuanqing, Chairman and CEO, Lenovo, in April said the China-based computer giant is in preliminary negotiations with a third party in connection with a potential acquisition.

However, news reports after Yang's comments seemed to indicate that talks between the two broke down over how to set the price for the server assets.

IBM's server business has not been doing particularly well as of late. For the second quarter of 2013, sales of the company's Power Systems Unix servers fell 25 percent over the same period as last year, while sales of its x86-based System x servers fell 11 percent.

IDC in late May reported that IBM remained the industry's second-largest server vendor in the first quarter of 2013 with sales of $2.8 billion despite a 13.4-percent drop in server sales over last year.

For the second quarter of 2013, IBM on Wednesday reported revenue of $24.9 billion, down 3 percent compared to the second quarter of 2012. Revenue from the US fell 4 percent over last year, IBM reported.

IBM reported a GAAP second-quarter profit of $4.3 billion, up 3 percent over last year, and earnings per share of $3.81, up 8 percent. On a non-GAAP basis, profit was reported at $3.6 billion, down 12 percent, and earnings per share fell 8 percent to $3.22. IBM attributed the drop in non-GAAP earnings to charges related to workforce reductions in the quarter.

Software revenue rose 4 percent over last year, with branded middleware up 9 percent. Loughridge said the company has a very good software pipeline going forward. "We see real momentum going from that second quarter into the second half of the year," he said.

Services revenue was down 4 percent for the quarter, but IBM reported a services backlog of $141 billion, which is up 3 percent over last year.

Total IBM systems and technology revenue for the quarter fell 12 percent, or 8 percent if the company's retail store solutions sales were not included. The hardware revenue drop was led by a 25-percent drop in Power Systems sales, an 11 percent drop in System x sales, and a 7 percent drop in storage sales. The only real bright spot in terms of IBM's branded hardware sales was its System z, sales of which rose 10 percent over last year. The company also reported a 6 percent rise in its microelectronics OEM business.

Loughridge said that IBM's PureSystems converged infrastructure solutions have done well since they were introduced about a year ago, with customers purchasing over 6,000 units so far.
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