Cloud business is bright spot in otherwise downbeat IBM earnings

Cloud business is bright spot in otherwise downbeat IBM earnings

IBM CEO Ginni Rometty

IBM is pursuing an aggressive plan to refocus on cloud services and analytics under CEO Virginia Rometty (right), but revenues are not materializing fast enough to offset the massive declines across the legacy businesses that still make up for the bulk of its revenues. That is reflected all too clearly in the company’s newly fourth quarter earnings, which were released earlier this week.

Big Blue experienced declines in every major division and most notably in the hardware group, which saw revenue plummet a massive 39 percent from last year to $2.4 billion. The revenue figure results may have been depressed by the company’s offloading of its unprofitable commodity server portfolio to Lenovo Group Ltd. in September. Nevertheless, demand for the high-end Power machines that the company held onto following the deal dropped 13 percent, while storage revenue fell 8 percent.

Not entirely unexpectedly, the hardware line that saw the biggest decline is the System z family of mainframes, demand for which grew upwards of 50 percent annually until a few years ago. Revenues were down 26 percent in the fourth quarter, possibly reflecting buyer hesitation in anticipation of the System z13 that IBM unveiled last week. IBM has shown confidence in its mainframe business, investing $1 billion in the new processor, which is geared specifically toward mobility and analytics workloads.

IBM’s professional services business didn’t fare too much better either, with business and technology consulting income down 8.4 percent to $4.3 billion and 7.6 percent lower at $9.2 billion, respectively. At the same time, the company’s software business – one of the main contributors to its profit – slid 7 percent to $7.6 billion, dragging net income to $5.5 billion for the fourth quarter.

That amounts to earnings of $5.81 per share, down from $6.13 a share a year earlier, on total sales of $24.1 million. But in the only highlight of an otherwise gloomy report, IBM said taht more than a quarter of that revenue came from cloud business – its designated growth engine – which soared 60 percent from last year to over $7 billion.

Chief financial officer Martin Shroeter told investors in the earnings call that the company intends to double down on that division with more strategic software-as-a-service acquisitions along the lines of CrossIdeas s.r.l, the information governance provider it picked up in July. At the same time, the company is also continuing to grow its global infrastructure footprint as part of a billion-dollar-plus expansion launched last year.

IBM is engaged in a major transition that is shown early signs of paying off. The question is whether CEO Rometty and her management team can manage the feat of sustaining that momentum while weathering the declines in legacy businesses long enough for revenue from cloud and analytics solutions to fill the gap.