IBM's revenue and profits continued to suffer from declining hardware sales in the fourth quarter of 2013. The company's CFO Martin Schroeter said its plan to address this problem revolved around investing in flash storage products and “right-sizing” business organizations for each of its hardware product lines.

IBM also has high hopes for its cloud services business, having recently committed to investing US$1.2bn in building 15 data centers around the world to add to the footprint of SoftLayer, the cloud services provider it bought in June 2013.

Along with business analytics and Smarter Planet, cloud is one of the three key growth initiatives IBM is counting on for 2014, Schroeter said during the company's fourth-quarter earnings conference call Tuesday. Smarter Planet is a six-year initiative that promotes use of IT to improve infrastructure, energy efficiency and sustainability at a global level.

The company announced its biggest and most recent analytics initiative earlier this month. It unveiled three new analytics services delivered by its Watson computing system as a service, and a $1bn investment in the new Watson Group, headquartered in New York City and charged with commercializing the Watson technology, which became famous in 2011 when it became the champion of the TV quiz show Jeopardy.

Hardware revenue down across the board

Revenue of the company's Systems and Technology group, its hardware business, declined 26% year over year in the fourth quarter, totaling $4.3bn. The group's full-year revenue declined $1.7bn in 2013, reporting a loss of more than $500m.

Revenue from sales of System z, IBM's mainframe computers, decreased 37% in the fourth quarter, compared with the last three months of 2012. Power Systems, IBM's servers based on its Power processor architecture, declined 31% in revenue.

Revenue from System x, its “low-end” x86 servers, was down 16%. IBM is considering selling this business group, potential suitors being Dell and Lenovo, the Wall Street Journal reported earlier this week, citing anonymous sources.

In addition to “right-sizing” the hardware business groups to bring them back to relevancy, the company hopes that continued momentum in flash storage sales will also help improve the category. Flash solutions contributed to “a few points” of growth during the quarter, Schroeter said.

Better news from software and services

IBM's two other major business divisions, software and services, did better.

The company reported $8.1bn in software revenue for the quarter, up 3% year over year. Its services revenue was $9.9bn, down 4%, which was consistent with the third quarter.

These revenues, however, were not enough to off-set the decline in hardware sales. The company's overall revenue for the quarter was $27.7bn, down 5%.

The China problem

Asia Pacific continued to be a challenging market in the fourth quarter, contributing in a big way to IBM's hardware troubles. The company's APAC revenue dropped 16%, compared to a 2% decline in the Americas and a 1% increase in Europe, Middle East and Africa.

IBM reiterated that its problems in the region were due to China and its ongoing economic reforms. In November, after about one year in office, the country's president Xi Jinping rolled out his reform plans.

While implementation of the wide-reaching changes to China's policies is in the future, they have already impacted significantly IBM's sales in the country. “They looked quite significant,” Schroeter said, referring to the reforms and admitting that he did not know yet how they will make their way through the system.

The biggest hit to IBM in China has been a slowdown in public sector sales. Many of the changes will affect state-owned enterprises, or some of the vendor's largest accounts. “We are centered pretty heavily in state-owned enterprises,” Schroeter said.

He added that the company planned to work on increasing diversity of its Chinese client base, going after regional banks and privately-owned enterprises. While the public-sector opportunity has not gone away, but it will take some time for it to come back to its former size.