IBM Revenue, Profit, Stock Price Drop As Transition to New, Cloud-Based Services Proves Slower Than Lost Business

Darryl Taft reports in eWeek:

."When tracking a company in transition, their legacy business initially will fall off faster than their new business can overcome because the old business starts with a bigger base and the percentage drops have a larger impact. What you are looking for is whether the firm can grow the new business and whether they can continue to fund the transition,"
IBM reported third-quarter revenues of $19.3 billion, down 14 percent from the same period in 2014. Net income for the quarter fell to $3 billion from $3.5 billion in the third quarter of 2014, down 14 percent.
IBM's quarterly results took heavy hits in both hardware, down 39 percent, and software, down 10 percent. The company's services units also saw declines.Yet, if there is a silver lining in all this, it is IBM's cloud business, which grew more than 65 percent year-to-date as IBM continues to transform its mix of offerings to higher-value solutions."In the third quarter, we again made progress in the transformation of our business to higher value, with strong growth in our strategic imperatives and expanded operating margins," Ginni Rometty, IBM chairman, president and CEO, said in a statement. "We are continuing to make significant investments to build platforms around analytics, cloud, mobility and security that lay the foundation for a new era of cognitive business—where we see long-term value for our clients and shareholders."Revenues from the company's strategic imperatives—cloud, analytics and engagement—increased 17 percent year-to-year and 20 percent year-to-date. Total cloud revenues (public, private and hybrid) increased more than 45 percent (or more than 65 percent, when adjusted for currency and the divested System x business) year-to-date—and reached $9.4 billion when tallied over the trailing 12 months, IBM said.

The annual run rate for cloud delivered as a service—a subset of total cloud revenues—increased to $4.5 billion from $3.1 billion in the third quarter of 2014. Moreover, revenues from business analytics increased 9 percent year-to-date. And revenues year-to-date from mobile more than quadrupled, while revenues from security increased 6 percent and revenues from social increased 32 percent."Like most global IT vendors, IBM is facing a number of headwinds in its traditional businesses," said Charles King, principal analyst at Pund-IT. "These range from economic uncertainties in core overseas markets to the impact of a strong U.S. dollar on sales to fundamental technological evolution and its effects on competition."Unlike some competitors, the company hasn't simply hunkered down or indulged in baseless optimism," King continued. "Instead, IBM identified core future opportunities, including analytics, hybrid cloud, cognitive computing and IoT, and has continuously invested the funds necessary to bring these initiatives to life. The significant growth these areas enjoyed in the past quarter is a testimony to IBM's vision and its management's willingness to think and act according to long-term imperatives."IBM saw its revenues decline across different regions. IBM revenues in the Americas totaled $9.1 billion, a 10 percent drop from 2014. Revenues from the Europe, Middle East and Africa, or EMEA, region were $6.1 billion, down 16 percent, and the Asia-Pacific saw revenues drop 19 percent to $4.1 billion. Revenues from the BRIC countries—Brazil, Russia, India and China—fell 30 percent."We are going through a significant transformation, and where we've been investing, we've been driving tremendous growth," said Martin Schroeter, IBM senior vice president and chief financial officer, during IBM's earnings call with analysts.Meanwhile, IBM's Global Technology Services segment revenues were down 10 percent to $7.9 billion, while Big Blue's Global Business Services segment revenues fell 13 percent to $4.2 billion. Yet IBM's estimated services backlog as of Sept. 30 was $118 billion, up 1 percent year-to-year, adjusting for currency.IBM reported that revenues from its software segment were $5.1 billion, down 10 percent from the third quarter of 2014. Revenues from IBM's key middleware products, which include WebSphere, Information Management, Tivoli, Workforce Solutions and Rational products, were $3.4 billion, down 7 percent year-to-year. Operating systems revenues of $0.4 billion were down 14 percent year-to-year.Despite hardware taking a hit, IBM's mainframe business increased. IBM said revenues from the Systems Hardware segment totaled $1.5 billion for the quarter, down 39 percent year-to-year. However, revenues from z Systems mainframe server products increased 15 percent from the year-ago period. Total delivery of z Systems computing power, as measured in MIPS (millions of instructions per second), increased 18 percent.  Revenues from Power Systems fell 3 percent from the 2014 period. And revenues from System Storage decreased 19 percent."When tracking a company in transition, their legacy business initially will fall off faster than their new business can overcome," said Rob Enderle, principal analyst with the Enderle Group. "That is because the old business starts with a bigger base and the percentage drops have a larger impact.

"What you are looking for is whether the firm can demonstrate they can grow the new business aggressively and whether, with the current rate of change, they can continue to fund the transition," Enderle continued. "Both are evident here. IBM remains cash-positive; so they are at no risk of being unable to fund the transition and the new business is growing very strongly suggesting a crossover point within four or five years where the firm will be measured mostly on the new revenue [rather] than the old."Enderle said he views IBM's third-quarter cloud revenue as "particularly impressive" at nearly $10 billion and 65 percent growth."In the end, the numbers show that IBM is plowing through the transition reasonably well, with some interesting surprises," he said. "Those surprises were strong mainframe growth, 15 percent—remember the mainframe was supposed to be dead in 1980—and an improved gross margin, thanks to the shift away from the old hardware-first model to mobile, analytics, security and social. Now we just need to see if they can sustain it."