IBM’s past is selling servers. Their future, however, lies in the advancements that the company is making in cloud, big data, security, and AI.
But, the future isn’t coming fast enough.
On Tuesday, Big Blue reported its Q4 earning for 2015, with another drop in both revenue and profits, making it the 15th month in a row that the company’s numbers have dropped. While IBM did beat some analyst predictions by a few cents per share, revenue fell almost 9% from $24.1 billion down to $22.1 billion in Q4. However, the full year drop was closer to 12%.
CEO Ginni Rometty initially took the helm after Sam Palmisano to focus the company on growth. And, while she made note of “significant progress in our transformation to higher value,” there’s no denying that IBM is struggling.
So, what’s killing IBM’s revenue? While numbers were down across the board since last year, the biggest drops were in systems hardware (-24.2%), global business services (-12.0%), and software (-9.8%).
Those number are, indeed, not very comforting but, when you consider IBM’s plans for the future, it makes sense. First, take a look at what Rometty said about the company’s areas of growth.
“In 2015, our strategic imperatives of cloud, analytics, mobile, social and security grew 26% to $29 billion, and now represent 35% of our total revenue,” she said. “We strengthened our existing portfolio while investing aggressively in new opportunities like Watson Health, Watson Internet of Things and hybrid cloud.”
She went on to note that as IBM transforms itself to a “cognitive solutions and cloud platform company” it will be able to deliver greater value and a better return. At the risk of sounding too philosophical, transformation does not take place without metamorphosis. Bloomberg made note of this back in January 2015, showing that IBM’s move to the cloud was requiring a sacrifice of revenue and renewed investment in innovation.
Forrester’s John Rymer said that it is similar to the challenges faced by companies such as Oracle, SAP, and Microsoft all suffered during their transitional period to the cloud.
“This is a huge change. The business model is very, very different,” Rymer said.
The business model shift is painful because these companies are used to getting money, and sometimes multi-year commitments upfront. While, now, they are trying to navigate the subscription models prevalent in the SaaS space.
Rymer said that one interesting trend he has noticed is organizations wanting to move their back office apps into public cloud for flexibility. With IBM already a trusted enterprise partner, and many apps running on IBM platforms, it presents a huge opportunity for them to make an impact in cloud.
“It’s a market that, if IBM plays it’s cards right, could really fuel some very big growth,” Rymer said.
Right now, all the vendors have the same opportunity to capture that revenue, Rymer said. AWS and Microsoft will definitely be going after it as well, so IBM has to make a strong play in order to claim a piece of it.
Additionally, back in September, the company called out the investment it was making in its cognitive computing platform, Watson–hoping to make it a “huge engine” for sales. And, IBM seems to continuing that investment with a host of new Watson partnerships launched at CES this year, among other news on the platform.
Watson is, indeed, central to IBM’s overall strategy, but Rymer pointed out that it is also key to IBM’s “ability to start growing again.”
But, will it be enough? Will the emphasis on cloud, big data, security, and AI suffice?
Right now, it’s too early to tell. IBM’s $2 billion acquisition of SoftLayer in 2013 got them some cloud credibility to start with, but it didn’t provide enough firepower to set them apart, as evidenced by the 2015 Gartner Magic Quadrant on cloud providers.
However, Rymer said that he is “cautiously optimistic” that they will succeed and, potentially, become a top tier player.
It’s a bold move for any company of IBM’s stature to make such a massive transition, and it takes a lot of resources to do it successfully. If IBM wants to realize their vision of transformation, it needs the future to get here faster.