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IBM: the latest old guard to post so-so results

Den Howlett Profile picture for user gonzodaddy January 21, 2014
Summary:
IBM hit earnings but missed revenue forecasts in Q4. Hardware is the big drag but there are new lines of business to cheer up the market.

ibm hardware q4 2013

IBM's Q4 2013 was at best a mixed bag with revenue coming in lower than expectations but with margin higher. By the numbers: Total revenue was $27.7 billion with earnings of $6.2 billion. That's down five percent from the previous year.

The fly in the ointment is the hardware business with sales in China of particular concern where revenue fell 23 percent.  On an analyst call, Martin Schroeder, IBM's CFO said:

In hardware we've entered the back end of the mainframe product cycle and we're dealing with some challenges in other areas. Together, these are impacting our overall results...The largest declines in China were in our hardware business.

As you can see from the image above, System Z and Power Systems both took a massive hit, falling 37% and 31% respectively.

Some commenters believe that IBM must divest parts of its hardware business. Earlier in the week, Larry Dignan at ZDNet reported that:

Various reports have indicated that IBM is looking to unload its low-end x86 business. Lenovo and IBM were in talks last year about a potential deal but couldn't agree on price. As noted previously, IBM is looking to move up market and the x86 server business could ultimately suffer the same fate as the PC market amid cloud computing.

IBM is not the only company with hardware troubles. Dell has had its share of woes and Oracle continues to find difficulty is developing a model that works, although it appeared to stabilise that business in its last reported quarter.

Still others believe that IBM needs to go further, perhaps divesting pieces of its services business as well. That would be a big step for a company that has set the benchmark for marrying service delivery to profitable business.

It is clear that IBM is pinning its future on new offerings like Watson cognitive services, cloud and security. The problem is that IBM faces strong competition with all these services or is offering solutions that have yet to mature. In cloud for example, Amazon continues to set the benchmark for infrastructure as a service while IBM plays catchup. Security is a many headed monster but with an emphasis moving towards identity well beyond traditional security services.

Stephen Wilson of Lockstep says:

The recent tragic experience of data breaches -- at Target, Snapchat, Adobe Systems and RSA to name a very few -- shows that orthodox information security is simply not up to the task of securing serious digital assets. We have to face facts: no amount of today's conventional security is ever going to protect assets worth billions of dollars.

Watson could be a big win but it is early days and it will take time for IBM to rev up the partner ecosystem to produce the kinds of new solutions business will require. When IBM recently talked about significant investment in Watson, Ray Wang, CEO Constellation Research got pretty excited:

Constellation believes that the IBM Watson team has put forth a wide range of innovative ecosystem partnerships across a diverse set of industries.  In fact, the client solutions center and design lab are key to clients experiencing how Watson can create disruptive business models and transform an industry.

Others are more prosaic. One insider told me that he sees the latest announcements as bolstering analytics, a business with which IBM has plenty of expertise but which is being pushed towards predictive solutions. One thing is clear, IBM's SAP implementation services are declining as global 2000 companies start to move towards 'steady state' - at least in the short term.

Verdict

Let's not get too excited any time soon. IBM, like others who grew dramatically in the late 1990's and early 2000's is adjusting to a secular change in the market. IBM has special experience of 'near death' and has plenty of experience upon which to draw as it transitions. However, it has made bold promises to the market including a goal of reaching $20/share in earnings by 2015. On the analyst call, the company reiterated that guidance.

But...the fact the company announced that the CEO and senior executives are forgoing their annual bonuses is a Big Red Flag. On the one hand, forgoing will be viewed as good business practice among a sector well known for rewarding failure. On the other hand, you have to wonder just how confident the company is in its ongoing forecasts.

Disclosure: SAP and Oracle are partners at the time of writing

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