Is IBM's Comeback On Track Or a Flash in the Pan?
After an agonizing streak of 22-quarters of declining revenue, IBM finally posted positive year-over-year revenue growth during its fourth quarter. The growth was driven by updated hardware products, favorable currency rates, and stronger growth in the cloud and security businesses, representing significant demand for cloud-based infrastructure and software, and heightened IT security concerns. For the quarter, total revenue rose 4% year over year to $22.5 billion (increased 1% in constant currency) and “Strategic Imperatives” revenue grew 14% year over year and contributed to 46% of IBM’s total revenue while Cognitive Solutions revenue was flat year over year at $5.4 billion.
The company calls its newer products and services in cloud, analytics, security, and mobile as “Strategic Imperatives” and the gains in this area have beaten the expectations of a number of analysts who predicted that growth would slow. IBM reported fourth-quarter sales of $11.1 billion in strategic imperatives which is up 17% from a year earlier. CEO Ginni Rometty had set a goal for IBM to reach US$40 billion in strategic imperative revenue this year, which would mean those newer products would make up more than half of the company’s business.
Much of the growth fueling IBM’s $22.5 billion in fourth-quarter revenue was driven from its new mainframe servers. Customers ranging from banks to healthcare companies are purchasing the hardware and accompanying software for their own data centers to run large applications such as financial transactions and customer billing.
Continued Momentum in the Cloud
For the quarter, traditional analytics products like data integration and content management were weak. In my view, the reason might be the fact that IBM's strong push for cloud computing is resulting in some overlap to its DXP portfolio. To put this into context, IBM markets the Watson Content Hub as an alternative to its Web Content Manager. Given that cloud revenue is making up 21% of IBM's total revenue of $79.1 billion, it is not hard to pick up that the cloud business is the area in which IBM has fully geared down on. In fact, during the earnings call, the company mentioned Watson 14 times, blockchain 17 times and cloud more than 50 times. “Big Blue” aims to be one of the Big Three in the Cloud Wars by taking on Amazon and Google. To that end, there are very positive signs retrieved from the fourth quarter results.
The "as a service" portion of IBM's cloud business posted revenue for the year of $9.3 billion. There is another part of IBM’s cloud business which is "hardware, software and services to enable IBM clients to implement comprehensive cloud solutions." That particular arm of the business generated 2017 revenue of $7.8 billion. That being said, technology services and cloud platforms, the unit that includes IBM’s cloud infrastructure and platform offerings as well as its consulting business, posted a revenue decline of 1.2%. It has something to do with the fact that some of its legacy software sales with bigger upfront revenue shifted to the cloud.
Admitting that the company needed to spend more time on developing these products better, IBM has plans to shift some traditional analytics products to software-as-a-service (SaaS)-based licensing. Speaking of which, IBM's SaaS business grew 30% for the fourth quarter.
"2018 will be all about reinforcing IBM's leadership position in key high-value segments of the IT industry, including cloud, AI, security, and blockchain," said CFO and senior vice-president James Kavanaugh in the press release. Additionally IBM’s senior vice-president Martin Schroeter told the analysts on the earnings call: "So not only are we building and moving new SaaS properties into the cloud—which have great margins—and not only are we building our Platform as a Service and building ecosystems around that, but we also have north of $120 billion backlogs in our services business that we're in the process of moving to the cloud."
Committed To Selling AI Solutions to Multinationals
Due to the ongoing explosion in the volume of data collected, many organizations are living in irony where they gather too much data but know too little about what this data represents. Not only do enterprises have to sort out unstructured data; but also they need to deal with unstructured content. According to the Economist, while content is doubling every 90 days, 80 percent of content used by knowledge workers for core revenue generation activities is unstructured. This explosive growth of unstructured content is becoming a big challenge for many organizations, especially for enterprises.
To address these emerging issues, vendors have been launching cognitive analytics platforms. IBM’s cognitive learning engine, Watson, is a very significant one of them, and the platform has been targeted by OpenText CTO and CEO Mark Barrenechea who has made it loud and clear that OpenText’s AI platform, called Magellan, is designed to compete directly with IBM’s Watson.
Since gaining its fame through the groundbreaking question-answering system in 2011, IBM has been investing billions of dollars and advertising aggressively. Although in recent years, Alexa and Siri have been garnering more of the public attention, when it comes to big-data enterprise-grade computing, Watson still lives up to its reputation of being the first to offer up its name.
IBM continues to build out its tentpole, Watson solutions software, and keeps generating hype surrounding these initiatives as the company believes that there has been good demand for these products. Although IBM’s Watson program (AI research) wasn’t referred to in the press release announcing the fourth quarter results this time, Rometty has previously committed to spending $1 billion on trying to sell AI solutions to multinationals.
For the fourth quarter, in fact, Cognitive Solutions (includes solutions software and transaction processing software) had revenues of $5.4 billion, up 3% (flat adjusting for currency), driven by security and transaction processing software. IBM is embedding its Watson artificial intelligence engine into a growing number of applications. The company is also heavily investing in the advertising of its blockchain technology, which allows customers to digitally track food safety, solve financial disputes and securely exchange health data.
The Marriage of Watson and Einstein
Earlier this month, Salesforce announced an expansion of their strategic partnership, bringing together IBM Cloud and Watson services with Salesforce Quip and Salesforce Service Cloud Einstein to enable companies to connect with their customers and collaborate more effectively with deeper insights. With this expansion, Salesforce has named IBM as a preferred cloud services provider and IBM has named Salesforce as its preferred customer engagement platform for sales and service. With more than 4,000 joint customers, the partnership has already helped companies implement new Watson solutions.
In the scope of the partnership agreement, IBM will build new IBM WatsonQuip Live Apps which will be embedded directly into any Quip document to increase the effectiveness of sales teams. For those who are not familiar with the product, Quip is a collaboration platform that Salesforce acquired a year ago. The platform directly competes with Microsoft’s Office 365 cloud-based service, which is something that IBM has been lacking.
Ginni Rometty was quoted in a press release, “Naming IBM as a Salesforce preferred cloud services provider demonstrates the power of the IBM Cloud to help companies fundamentally change the way they do business, this expanded partnership builds on the combined power of Watson and Einstein to help enterprises make smarter business decisions.”
Marc Benioff, chairman and CEO, Salesforce said, “The success of our customers drives everything we do at Salesforce, including our strategic partnership with IBM, the combination of IBM Cloud and Watson services with Salesforce Einstein and Quip will deliver even more innovation to empower companies to connect with their customers in a whole new way, leveraging the power of the cloud and AI.”
IBM Named a Leader in Gartner’s MQ for DX Platforms
As CMS-Connected also covered, Gartner published its first MQ for Digital Experience Platforms last week, and IBM has been named as one of “Leaders” in the report. You can read the exclusive coverage of the MQ, here.
In the report, Gartner’s analysts evaluated the vendor’s DXP functionality based on IBM Customer Experience Suite and IBM Employee Experience Suite. As a result, the Stamford, Conn.-based research firm concluded that only a “few DXP vendors can match IBM's list of capabilities, features, and functions” as its products cater to complex digital enterprise needs. That being said, Gartner believes that the vendor has been facing a “legacy” reputation issue when it comes to its digital experience offerings.
Do all these mean that the iconic 106-year-old company has finally turned a corner? Nobody knows yet. However, IBM’s investors are not impressed by the positive results. First off, IBM took advantage of currency changes and without a currency adjustment, the quarterly growth would only have been 1%, not 3.5%, according to IBM's own calculation.
Secondly, mainframe sales were the main driver behind the growth as they were 71% higher than in the same quarter of last year. Therefore, to keep pumping up revenue over the next couple of quarters also means maintaining this performance. On top of that, IBM will have to show that its bets on newer lines of business, like cloud computing and artificial intelligence are paying off. That's the only way the company could keep growing in a sustainable fashion.
Although by the look of it, sales growth in "strategic imperatives" by 11% (or 10% after a currency adjustment) seems impressive, they still haven’t been big enough to offset the loss of revenue in other areas. To return to growth IBM needs to keep up the momentum in its various business lines. In fact, according to some industry insiders, Systems Hardware sales, up 35%, were the bright spot in IBM's latest revenue posting otherwise mediocre quarterly results. This area is typically a declining revenue stream but in IBM’s case, sales of mainframe servers, as well as accompanying software lifted this segment up.
Overall, now, we don’t know if CEO Ginni Rometty's heroic transformation of the company will finally keep paying off in the upcoming quarters but we will continue to report on Big Blue’s battle with its blue days, here at CMS-Connected. Stay tuned!