IBM watchers, take a deep breath and relax.  On Wednesday, IBM reported quarterly financial revenue that was its worst in five years.  Some truly epic numbers are unfortunately found throughout the report – at the high levels, 4 percent revenue shrinkage of $22.5 billion, net income shrinkage of 21 percent at $2.38 billion and a net margin decrease from 13 percent to 10.6 percent.  Looking a bit deeper, the company’s hardware group declined 23 percent a figure that was projected to only drop 15 percent at this time.  In many ways, it looks bad and people may be questioning what is going on.  Well, the sky isn’t falling people – this is what it looks like when a company is reinventing itself, hardly a small feat with a company of IBM’s size and influence.   Perhaps there is some over-analyzing and a bit of patience with IBM’s transformation is required.

Reinvention

This reinvention is focused on these exact pain points, dwindling businesses are always going to affect the bottom line and IBM has plenty of businesses they are pruning as they shift to a more cloud-centric model:

To reinvent itself as a cloud-oriented business, IBM has been selling off its hardware groups and shifting gears to a services model. The company has also been making strategic cloud industry acquisitions, as well as creating innovative solutions based on initiatives such as Watson. To help its clients reinvent themselves as cloud-oriented companies, IBM is helping them transition from their legacy IT environments to more modern, software-driven data centers. – Suzanne Kattau

It certainly is an interesting point in IBM’s history, their hardware divisions are clearly getting kicked in the teeth, but it’s all part of the plan:

..in 2013, the company had $4.4 billion in cloud-based revenue—of which about $1 billion was for services. Mason said cloud is already a “significant business for IBM. Now we’re doubling down.” He said IBM is investing $1.2 billion in infrastructure build out, along with other investments in cloud platforms.

As far as the global roll-out goes, Mason said that as of today, IBM has 13 data centers with SoftLayer and 12 at IBM. “And we’ll take it to 40 by the end of the year,” he added. – Kattau

Hardware groups are low-margin money losers nowadays and IBM has been spinning out of this, scaling their way as evidenced by the sale of its low end server business to Lenovo Group Ltd. and its rumored exploration into selling its semiconductor manufacturing ops.  Everything is increasingly going to cloud and software, as customers throughout the industry gravitate away from classic hardware.  The stuff of mainframes, tape drives and storage arrays is starting to shift over to cloud services where businesses can rent computing power without the hassle and costs it takes to host their needs on-premise in traditional data centers.

• Cloud revenue up more than 50 percent:
• For cloud delivered as a service, first-quarter annual run rate of $2.3 billion doubled year to year;      
• Business analytics revenue up 5 percent, up 6 percent adjusting for currency – IBM 1st qtr 2014 report

Business Analytics: miss

Business analytics surely a bit of disappointment as it indicates a bit of an unexpected soft growth compared to that of the past year.

Q1 2013: Business analytics revenue up 7 percent

Q2 2013: Business analytics revenue up 11 percent;

Q3 2013: Business analytics revenue up 8 percent year to date;

That’s a bit of a problem, but it is also quite likely an indicator of a trend throughout the industry.

Elementary, Watson

What about Watson?  As Suzanne summarizes, the Watson initiative is also a critical component in this mission:

Mason told Furrier and Vellante that what that data allows IBM to do is to be much more targeted and insightful. “There is no way we can process it with the technology from the past,” he explained. “That is where Watson comes in. There is a clear deliverable there. The goal is to make technology work easily to drive businesses forward.” – Kattau

Watson is an incredible IBM asset that is being leveraged in services and products throughout the brand’s product line.  This will be something to watch.

Bottom Line:  IBM is here to stay, the purchase of Cloudant and Softlayer are indicators of a clear strategic migration to this new cloud and software proposition to where IBM is headed.  It’s the future.  Their security shop has the chops, all the tools and technical advantages you can dream of and partnerships with many major corporations.

If you’re watching this company quarter to quarter, if you’re invested in the performance of this technology titan, this is exactly what you’d expect per quarter.  IBM is in it for the long run, they’re not the young, hot startup and they don’t have to act that way. And they’re all in, even the execs have taken a pass on their annual bonuses to get it done. Leveraging what’s working, what’s best and pruning that which isn’t- it just takes time.

photo credit: Looking Glass via photopin cc