IBM has been in transition mode for more than five years running now, a period that saw its revenues decline year after year as the company shifted focus towards high-margin business lines that can work for the next several decades. But the market has refused to be impressed with the transition, which possibly went on for far too long for investors’ tastes. A quick search on the internet would lead you straight to articles that talk about how IBM has already jumped off the cliff and there is no way it can get back to its old self.
Transitions are always painful, especially if you are company with tens of billion of dollars in sales. IBMs sold its personal computing division to Lenovo way back in 2005. The company was losing money in its PC division before it decided to pull the plug, a move which looks like a masterstroke ten years later, considering the way things have shifted in the PC world. IBM could have easily chosen to double down on the PC business but it moved away.
The Silent Sibling of the Cloud Fraternity
IBM’s shift into the cloud business wasn’t an organic one. The company shopped around for the last five years, spent billions of dollars and bulldozed its way into the cloud business. Clearly, the company was late to the party and realised the need to move fast as its bottom line and top line were getting tighter and tighter with each passing year. The company was slow to act on that front, and it never really looked out the window in search of newer business streams when things were going well.
Even now, when you look at the way discussions about the cloud industry happen, sadly, IBM gets left out most of the time as most of us stop our discussion with Amazon, Microsoft and Google. All three companies have shown enormous amount of dedication and effort in shaping the discussion, while IBM sadly watches it from the sidelines despite having a cutting edge Analytics division which is a stone’s throw away from hitting $5 billion in quarterly sales.
Most of IBM’s Analytics division’s revenues can be counted against its cloud business because, invariably, the delivery system has to be a cloud-based one for it to be easily accessible. At five billion dollars in quarterly revenues, that unit alone will be pulling close to $20 billion or more very soon. But even in this space, any discussion about artificial intelligence and hyperscale computing includes Microsoft and Google, but not IBM. And, honestly, I believe it is IBM’s fault.
A Long, Hard Look at IBM Analytics
There are plenty of reasons to believe that IBM’s Watson is already proving to be a great jewel in IBM’s portfolio. On the infrastructure as a service front, Amazon and Microsoft have pulled way far ahead of other companies while IBM has been focusing on the hybrid infrastructure model. Since none of the companies will give us the layer by layer breakup of revenues, it is really hard to break things down and compare one service against another. The best possible solution to that problem is to look at their growth numbers. IBM has so far kept pace with Amazon and Microsoft, both of whom have been growing their cloud businesses at high double-digit rates, staying around the +50% level.
IBM’s as-a-Service run rate has moved from $5.4 billion during the first quarter of 2016 to $7.5 billion during the third quarter. When things keep increasing sequentially, then we can safely assume that there is enough momentum to carry the growth deep into several quarters in the future.
One point of concern that remains is their Analytics division, which grew 9%, 4% and 14% in the first three quarters of the year. With no clear competitor in this area, the growth could - and should - be much higher. If this segment keeps putting up strong growth numbers it will have a ripple effect on their other cloud products as well. The Analytics unit reported $4.9 billion in revenues during the second quarter and $4.8 billion during the third quarter, and if the company can post higher numbers during the fourth quarter and stay the course for next year, the new-age business streams will have then come a long way in shaping IBM’s future.
If you have invested in IBM, those are the key numbers you will need to watch: how much year-over-year growth their Analytics division reports, and how much it grew sequentially.
Disclosure: I have no positions in the stock mentioned above and no intention to initiate a position in the next 72 hours.
