IBM revenue did not grow in Q3 despite $12 bn investment

IBM posted flat revenue growth in the third quarter of 2016.

IBM’s Q3 2016 revenue was $19.2 billion. IBM CEO Ginni Rometty said the company’s third-quarter performance, led by continued double-digit growth in our strategic imperatives, is a testament to its leadership in cognitive solutions and cloud.

IBM’s main segment revenues

Cognitive olutions $4.2 billion (+4.5 percent)
Cloud revenue + 74 percent
Solutions Software + 8 percent

Global Business Services $4.2 billion (–0.4 percent)
Technology Services & Cloud Platforms $8.7 billion (+2.4 percent)

Systems $1.6 billion (–21.0 percent)

Global Financing $412 million (–7.9 percent)

“Whether it is banks implementing IBM blockchain solutions, hospitals leveraging Watson to fight cancer, or retailers using cognitive apps built on the IBM Cloud to transform the customer experience, clients across all industries are tapping into a new kind of innovation value from IBM,” said Ginni Rometty.

IBM made investment of more than $12 billion across capital expenditures, R&D and acquisitions so far this year.

“Throughout the year, we have continued to invest where we see the greatest opportunities to create new markets and strengthen our enterprise IT leadership position,” said Martin Schroeter, IBM senior vice president and chief financial officer.

CAMSS initiatives remain a key aspect of IBM’s strategy to transform its portfolio to address modern business needs, said Stephanie Long, research analyst at TBR, analyzing the revenue of IBM during Q3 2016.

IBM’s commitment to restructuring its business to more closely align with evolving customer demands continues, and its impact on revenue performance can be seen in IBM’s ongoing slowdown of year-to-year revenue declines. In 3Q16, IBM reported corporate revenue of $19 billion, a decline of just 0.3 percent year-to-year, and the fourth consecutive quarter of sequential improvements to year-to-year declines.

Revenue declines will slow once more year-to-year in 4Q16, and return to growth in 1Q17. TBR forecasts a 1Q17 uptick based on IBM’s substantial portfolio adjustments made over the last 2 years, including the addition of CAMSS initiatives to its investment strategy and the divestiture of its x86 business to Lenovo, coupled with substantial acquisition activity such as The Weather Company assets. However, IBM asserts it will maintain its heightened investment activity that will dampen near term margin performance during this transitionary period in its history.

IBM’s strategic investments in its CAMSS initiatives continue to yield rising revenue streams, resulting in a 16 percent year-to-year increase in overall CAMSS revenue in 3Q16. Cloud maintains its dominant role in CAMSS revenue growth, increasing more than 40 percent year-to-year in 3Q16. Key announcements made throughout 2016 will foster strong cloud growth for the remainder of the year. Further, recent cloud-related investments emphasize IBM’s existing hardware capabilities, building off of its hardware foundation with software and services capabilities to reinvigorate hardware sales in the long-term.

System software remains pressured by declining operating systems sales at least partially offset by rising demand for their software-defined storage portfolio. Though IBM’s Systems revenue declined a reported 21 percent year-to-year, this was largely influenced by the cyclicality of IBM’s mainframe business, and is a sequential improvement to year-to-year growth, indicating IBM’s investments are improving Systems revenue performance. Beyond the negative impacts of where IBM sits in the Z product lifecyle, hardware revenue faces pressure from declining Unix sales impacting Power that is only partially offset by upticks in Linux demand. Similarly, IBM remains committed to the storage space where it makes additional investments to broaden the depth and breadth of its flash portfolio.

As evidenced by 2016 announcements, IBM will leverage OpenPOWER to achieve rapid innovation in strategic growth markets, such as cloud

IBM is leveraging its OpenPOWER Foundation to encourage development of next-generation technology, such as cloud enabling solutions. By opening up its Power technology to third-party developers and a current partner roster of 250, IBM positions itself to benefit from the ecosystem network effective in developing cost-effective modern solutions built on the OpenPower technology platform. OpenPOWER announcements throughout 1H16 indicate that significantly more solutions will be brought to market in 2017, positioning IBM to reap more revenue benefits from the foundation.

In September, IBM unveiled Power Systems for the Cloud. This product will enable customers to create local clouds for AIX, IBM i, and Linux use cases. Expanding Power’s presence in the cloud enhances IBM’s brand and will facilitate increased adoption of IBM’s Power servers for cloud installments. Specifically, IBM is targeting competitive displacements of Intel x86-based cloud implementations by going to market with its Power technology adhering to the ARM licensing business model. OpenPOWER reinforces this foundation, as collaborative innovation that occurs within the foundation will inherently increase use-cases for IBM’s Power Systems in modern installments including the cloud.

IBM is messaging stronger capabilities of its proprietary servers, including increased security, performance and reliability as reasons for customers to switch from x86 servers to Power. TBR notes that IBM’s ongoing investments in developing a POWER9 chip will further enable the vendor to displace x86 vendors, messaging performance enhancements to reinforce existing messaging efforts regarding security and reliability. In October, Google and Rackspace unveiled Zaius, their newest server which is based on POWER9, and have shared their Zaius design with the Open Compute Foundation — a key step in IBM’s mission to increase its competition with Intel’s x86 servers.

IBM views Blockchain as a powerful disruptor in many key industries that can accelerate transformation opportunities for IBM and customers alike

IBM views Blockchain as a critical enabling technology capable of disrupting existing workflows in multiple industries, most notably financial services and healthcare. In many ways, Blockchain represents the gateway to new Decision Support opportunities which CEO Ginny Rommety described as representing a $2T accretive market opportunity on top of the existing $1.2T ICT at its financial analyst event. As such, IBM recognizes it has to build both the underlying enabling technology platform as well as a rich set of consultative and advisory services to guide customers through the business process transformation Blockchain technology enables, according to an analysis by TBR.

Blockchain, and more specifically IBM Hyperledger running on z Systems, increases efficiencies across supply chain and sales transactions, which will drastically reduce discrepancies in supply chains. Initial adoption of Hyperledger will be slow as it is unlike existing customer business processes. Further, many customers have security concerns related to leveraging Blockchain, although IBM repeatedly comments on the highly secure nature of Hyperledger.

Once IBM is able to ensure security by leveraging customer examples, there will be strong demand for Hyperledger once first move user cases become prevalent from the finance and healthcare secotrs, both of which have large quantities of sensitive data needed portioned access by many different work flows. In order to spark interest in this next-generation technology, IBM has made Blockchain available for free in beta, encouraging developers to innovate use cases before it is officially released, and providing strategic first mover enterprises the capability to begin internal “skunkworks” projects to trial new business use cases and affirm for themselves the security and reliability of the technology.

Baburajan K
[email protected]