Friday 16 November 2018

Doubts over IBM's strategy after revenue targets missed

Playing catch up: Ginni Rometty, chief executive officer of IBM
Playing catch up: Ginni Rometty, chief executive officer of IBM

Olivia Carville

INTERNATIONAL Business Machines Corporation missed analysts' quarterly revenue estimates, ending a short-lived streak of sales gains and casting doubt on its strategy to boost growth through new businesses such as cloud and artificial intelligence.

Revenue fell 2.1pc to $18.8bn (€16.3bn)in the third quarter, while analysts were expecting $19.1bn (€16.5bn).

Cloud revenue, which has become a key metric to watch, grew 10pc in the period to $4.5bn (€3.9bn). That was slower than the 20pc expansion in the second quarter. Profit, excluding certain items, was $3.42 (€2.96), IBM said on Tuesday in a statement, compared with the average projection of $3.40 a share, according to data compiled by Bloomberg.

After six years of declining sales, the company showed gains in the past three quarters. Those were largely due to its legacy mainframes, the massive computers that help power global financial transactions for businesses.

A new sales cycle for those computers, launched about a year ago, is now winding down and the newer businesses IBM has been counting on to spur future, sustainable growth - known as "strategic imperatives" - have expanded over the past three years, but have yet to fulfil their promise. The group includes IBM's Watson artificial intelligence program, security software and cloud computing. In the third quarter, revenue from strategic imperatives rose 13pc for the past 12 months to $39.5bn (€34.2bn). That was a slower 12-month growth rate than the 15pc reported in the previous quarter.

Jim Kavanaugh, IBM's chief financial officer, said that the deceleration in cloud and strategic imperatives revenue growth was because of IBM "wrapping up our most successful mainframe product ever".

Revenue in the cognitive solutions unit, which includes many Watson-related products, fell 6pc in the third quarter, IBM said. Sales in the Global Business Services division rose 1pc, while Technology Services & Cloud Platforms posted a revenue drop of pc. The company's Systems unit saw sales gain 1pc, and Global Financing revenue declined 9pc.

Mr Kavanaugh said that IBM "fell short" in third-quarter signings in services, but added that the business is expected to ramp up in the next quarter.

IBM is bolstering its appeal to customers by strengthening its Artificial Intelligence arm, running 75 active blockchain networks and helping to protect banks from cyber attacks, Mr Kavanaugh said, adding that more than 400 businesses have already embraced IBM's one-year- old secure Cloud Private program.

The real threat for IBM is that demand for its mainframe servers is rapidly fading as "everyone is migrating towards the cloud," said Ivan Feinseth, an analyst with Tigress Financial Partners LLC.

"They need their new key initiatives, such as the cloud and Watson AI development, to continue to ramp up," he said. "They are growing, but they are not moving the bigger needle and that's the issue."

On Monday, IBM unveiled a new technology platform to help companies manage security, artificial intelligence and storage services across multiple cloud systems, regardless of where they were built. This is part of IBM's strategy to make cloud services more compatible with its competitors, rather than taking them head-on as it vies to catch up.

Bloomberg

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