What International Business Machines Corp. (IBM) Needs To Do Now

wall-street-etfJim Bach: Q4 International Business Machines Corp. (NYSE:IBM) earnings were released today (Wednesday). And unfortunately, this quarterly report suggests IBM stock is as much a “hold” as it was entering the year.

Revenue was down to $24.11 billion. This was a 12% drop from the year before and the 11th straight quarterly drop. Earnings-per-share (EPS) was down to $5.57 from Q4 2013’s figure of $5.80. International Business Machines Corp. (NYSE: IBM) bested Wall Street’s EPS estimates, but fell short on sales.

While it’s troubling that sales fell for the 11th quarter in a row, a deeper look at IBM’s financials reinforce where the real trouble lies. And they are much more entrenched than a mixed earnings season.

IBM stock was down 2.2% in after-hours trading to $153.50. It’s down 4.3% on the year.

Here’s what to keep in mind with today’s Q4 IBM earnings…

The Complete Story Behind the Q4 IBM Earnings

IBM unveiled a new mainframe last week. And it was impressive.

The z13, as it’s called, is designed to process an extremely high volume of mobile transactions – 2.5 billion a day, or 100 Cyber Mondays.

The IBM mainframe business could use an upgrade. Revenue in IBM’s System z segment – its primary mainframe segment – had fallen in four straight quarters. For Q4 2014, it fell 26%. Obviously, the previous product cycle is close to an end.

IBM also sold off its low-end server business to Lenovo last year. These servers provided $4.6 billion in revenue for 2013, but provided no income. That puts more pressure on z systems to fill the void that the departure of x system, which typically provides around 30% of hardware revenue, has left.

But as necessary as the unveiling was, it brought all of IBM’s problems to the fore.

Here’s why…

IBM wants you to know they’re focused on the future.

Through their press releases and shareholder meetings they often highlight mobile, cloud, analytics, and security as their big growth areas.

This was never more evident than at last week’s unveiling of the z13. Speakers at the event talked about how the z13 fits in with each of these initiatives. In fact, over almost 3 hours, speakers mentioned the word “mobile” 117 times, “analytics” 67 times, “cloud” 36 times, and “security” 14 times.

These are exciting buzzwords, but what does IBM have to show for it? Cloud revenue was up 60% this past year. Analytics revenue was up 7%. Mobile tripled. Security was up 19%.

But total revenue was down 12%. Like I said, it’s been down for 11 straight quarters. For all the promise these four initiatives are supposed to bring to IBM, they’re not helping much now. And the stock is touching levels not seen since well before the current Chief Executive Officer Virginia “Ginni” Rometty took over in 2012.

It’s been a year since IBM announced it was getting out of the low-end server business. And the strategy going forward is now clear – shed unprofitable segments and refocus on what IBM was always known for, the almighty mainframe.

But that’s part of the problem…

What IBM Needs to Do Now

“Little servers are the future of big computing. IBM needs to be a major supplier and a major player in this emerging market,” Robert Cringely, technology blogger and one of IBM’s harshest critics wrote last year of IBM’s high-end server focus. “For a fraction of the cost of an IBM z-Series… the equivalent compute power can be assembled from a modest number of low-cost servers and the new software tools.”

Pages: 1 2

Leave a Reply

Your email address will not be published. Required fields are marked *