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IBM: The Hardware Business Is Falling, but It Is Focused on the Cloud

April 14, 2014 | About:
mitu77

mitu77

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IBM (IBM), the hardware giant of yesteryears, now seems to be facing trouble in its revenue from it hardware segment, which is declining year over year. This has created worry among investors. IBM has been diversifying and is focusing on SAAS applications and cloud technology, but it’s a tough journey ahead with various established players in the cloud segment offering stern competition.

The company, in the past, had a strong hold in the database market, but recently as per IDC, Microsoft has dislodged IBM’s position by overtaking it in global database market share.

Investors have witnessed a fall in its share value by 4% on the day of its last quarterly results, largely because of weak hardware sales and consecutive decline in seven straight quarters. Its revenue from system Z mainframes servers fell 37% while system X dropped 16%, and revenue from power systems also fell 31%. So, in totality, IBM seems to be losing its grip on the global hardware market.

The fall in the hardware revenue was partially offset by the software segment of IBM, which recorded revenue of $8.1 billion, up by 3% from the same quarter the previous year. IBM’s middleware products like WebSphere, Tivoli and Information Management also improved 5%, totaling revenue of $5.8 billion. The company recorded a negative swing of $1.7 billion in hardware profits.

Consolidated revenue for fourth quarter 2013 was $27.7 billion, down 5% from the year ago quarter and even failing to beat the Street’s expected revenue of $28.26 billion. The company reported net income of $6.2 billion as against $5.8 billion in the year-ago quarter, up by 6%.

Focused on Cloud

As cloud technology is maturing, we see more and more businesses and government agencies moving to the cloud to lower their operation cost with ease of management and stronger customer relationship.

IBM is staying focused on its cloud leadership by providing worldwide support to companies that are increasingly relying on the cloud to operate their business. IBM has also associated with global leaders like Turk Telecom, The Loft Group, KUULUU and many more to be a leader in this segment.

The company has made certain acquisitions in the past to firm its grip on the global cloud market share. IBM’s persistence is exemplified by the fact that it spent around $7 billion for 16 acquisitions and 40,000 industry experts. SoftLayer was one of the most recent acquisitions of IBM to strengthen its cloud portfolio. The company stays committed to expand its cloud offering to 40 data centers globally, spread across five continents and to double the capacity of SoftLayer by end of 2014

Another recent announcement of IBM, was to acquire Cloudant, the company known to provide database as a service for mobile apps and web app developers. This acquisition will be catalytic to growth of IBM’s products like Big Data Analytics, Cloud Computing and Mobile Apps. The financial terms of the acquisition is still not disclosed.

Conclusion

IBM strongly relies on it share repurchase programs, which can influence its EPS and also meet estimates in 2014 and 2015. Savings of $1.5 billion would also affect the EPS of the company ($1.15 per share). This will also have an impact on IBM’s margins.

The only dilemma can be whether IBM sticks to its repurchase programs or gets more aggressive with its acquisitions. But whichever strategy is opted for by IBM, both will be beneficial for growth.


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