The unit, which contributes a whopping 39 percent of IBM's overall revenues, yesterday surprised analysts by reporting flat year-over-year revenue growth, compared to analysts' expectations of 6.5 percent growth for the quarter.
In a conference call, IBM executives said the shortfall was partly due to an overall slower-than-expected recovery from sluggish sales, as companies have cut back to recover from costly Year 2000 computer fixes. But a larger issue that is hitting IBM as well as other large services firms is the transition away from mainframe and big-system consulting work to e-commerce consulting.
Like other established services firms such as EDS and CSC, IBM Global has been under the gun to make this transition sooner than later, as smaller, more agile firms such as Scient, Viant, iXL, Sapient and Lante make their way into the Web business. As demand grows for e-business guidance, analysts say companies that can quickly address the needs of dot-com start-ups and other Web firms will become the leaders in the nascent market.
"(IBM Global) is going to have to refocus their efforts (to the middle market), and they certainly have to determine how not to be cannibalized by some of the smaller, more nimble firms who are eating their lunch," said Julie Giera, an analyst at Giga Information Group.
Giera said that while IBM Global has been successful in attracting more e-commerce and Web-related work, the company may still face a rough road ahead as it continues to work on its Net business.
"Certainly the outsourcing and professional services industry is continuing to grow, but there are a whole series of competitors that are much more specialized (than IBM Global) in the areas of e-business and e-commerce, " said Giera.
IBM Global Services reported revenues of $7.6 billion, down from $8.7 billion a year ago. More shocking, analysts said, was the meager 5 percent growth in new business the unit reported for the quarter. In the previous quarter, new business contracts grew 7 percent, analysts said.
Overall, IBM reported that first-quarter sales fell 4.8 percent to $19.35 billion, while analysts expected $21 billion. On the news, the company's stock dropped by as much as 7 percent today.
In research notes, PaineWebber analyst Don Young called the results "upsetting." He wrote, "This is clearly the biggest services miss IBM has had in five years."
Analysts at Banc of America Securities, which downgraded IBM's stock to a "buy" rating from "strong buy," said the company's services results were surprising and fell short of expectations. In research notes, analysts suggested that additional contracts inked just last month could result in a more positive outlook for the company in the long term.
While overall revenues in the services unit remained flat, IBM said that e-business services growth came in at 70 percent--far exceeding growth rates of competitors such as EDS, which reported 20 to 25 percent growth rate.
Giga's Giera said that IBM Global has been known to turn away smaller engagements and is instead trying to land larger, long-term accounts simply because overhead costs are much less. But, in the near term, she said, that strategy will continue to hurt the company financially, and it needs to accommodate smaller and mid-sized businesses.
Susan Scrupski-Miranda, an industry analyst who heads IT Services Advisory, maintained a positive outlook for the services giant despite the overall disappointing financial results. She said that among the traditional professional services firms, IBM Global is well ahead of EDS and CSC in terms of revamping its strategy for the Internet.
"If anything, IBM is reflecting what's happening in the larger IT services segment," said Scrupski-Miranda. "A lot of these companies are retooling for the Web. The real benefits are going to be seen in a couple quarters ahead."