IBM revenues down but cloud has a silver lining

IBM Cloud delivers silver lining to Q1 results image credit Pixabay/ronjohns2
IBM Cloud delivers silver lining to Q1 results

IBM issued its first quarter results and demonstrated that while IBM Cloud and cognitive computing are performing well there are areas of concern. Overall revenues fell for the 20th quarter in a row. Ginni Rometty, IBM Chairman, President and Chief Executive Officer put a positive spin on things but was absent from the analyst briefing for the results. She commented: “In the first quarter, both the IBM Cloud and our cognitive solutions again grew strongly, which fueled robust performance in our strategic imperatives. In addition, we are developing and bringing to market emerging technologies such as blockchain and quantum, revolutionizing how enterprises will tackle complex business problems in the years ahead.”

Revenues were down to $18.16 billion from $18.68 billion. Hardest hit was the Systems division down $280 million to $1,395 million. While cloud and technical services revenues were down, cloud revenues increased by 35% this quarter. That surge was led by cloud as a Service revenues, up 60%. Mobile was also up over 20%.

Stick that Oracle

Martin Schroeter, IBM’s Senior Vice President and Chief Financial Officer , Courtesy of International Business Machines Corporation. Unauthorized use not permitted.
Martin Schroeter, IBM’s Senior Vice President and Chief Financial Officer

Martin Schroeter, IBM’s Senior Vice President and Chief Financial Officer was in bullish mood during the analyst call. In a message that may have been aimed at Oracle, just to say we’re still in the game, and ahead of you, he commented: “With over $14.5 billion in cloud revenue over the last 12 months, we’re the global leader in enterprise cloud. We play an important role in running the critical processes of the largest enterprises. And so it’s not surprising that each of the 10 largest global banks, nine of the top 10 retailers and eight of the top 10 airlines, are now IBM cloud as-a-service customers.” (Source : Seekingalpha.com)

In fact there was no mention of any competitors during the call. IBM does things its own way and Schroeter pointed out that while the shifting of resources in global consulting is happening, he does not see the need for additional pruning (of staff). That will be a relief to IBM staff and is a clear indication that IBM is regaining a focus on cloud and cognitive. That shifting of staff relates to moving consultancy in the Global Business Services division to cognitive computing. There is also likely to be a flow towards Salesforce and IBM Bluewolf after the Salesforce/IBM partnership was announced a few weeks ago.

This is a double whammy for Oracle potentially. Not only Are IBM potentially moving consultants away from traditional ERP they are also assisting Salesforce in the race to $10 billion cloud revenues.

Smarter investment.

The cost saving process is visible in the reduction in general administration costs, down $860 million year on year. Meanwhile R&D investment is up by $73 million. This is investing in the future and is a smarter use of resources as IBM reconfigures itself. IBM today is nothing like the company of 20 years ago.

Interestingly it also has $10 billion in cash or equivalents, up $2 billion from a year ago. It will be interesting to see whether that is invested in any acquisitions. Schroeter seemed to indicate that they will look to embed the latest acquisitions rather than look for more commenting: “We also know that we’ll wrap on last year’s larger acquisitions, there will be less dilutive to profit in the second half as we continue to ramp revenue and realize some operational synergies.”

The impression is that IBM is consolidating its acquisitions and looking to increase their revenue over the next few months. Schroeter believes that the full year earnings will stay in line with expectations at $13.80 per share.

Conclusion

Is the tanker turning round? It certainly seems so. Cognitive computing with IBM Watson is announcing new relationships each month. These will take time to turn in revenue but the declining trend on revenues should start slowing soon.

IBM is also not relying on existing revenue streams. It is investing in and delivering solutions in the latest technologies including blockchain. The investment in R&D, is an indication that this will continue. That investment includes the Power Systems division. While that is broadly declining its entry in the Linux market is performing ahead of the rest of the market and Hana on Power is also doing well according to Schroeter.

IBM shares dropped by 5% after the close to $161, analyst recommendations are broadly neutral though with the majority on hold. If the signs are positive by the third quarter it will be a better indication of where IBM’s turnaround is.

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