April 19, 2017 / 12:36 PM / 7 months ago

IBM's cloud provides little silver lining

NEW YORK (Reuters Breakingviews) - IBM’s cloud provides little silver lining. Big Blue fell short of investor expectations and reported its 20th consecutive quarter of falling revenue. Boss Ginni Rometty keeps talking up artificial intelligence and remote servers and services. Competition, however, may prove too formidable.

The sign at the IBM facility near Boulder, Colorado September 8, 2009. REUTERS/Rick Wilking

All the financial engineering in the world – and IBM has engaged in a lot of it over the past decade by selling businesses and borrowing to buy back stock – can’t hide that the $160 billion company has been caught short by big shifts in technology. The switch to cloud computing and programs has curbed demand for its consultants, hardware and traditional software.

It has survived mass extinctions before, but there’s mounting skepticism it can thrive in the current climate. Over the past five years, the company’s shares have fallen 16 percent compared to a 68 percent increase for the S&P 500 Index.

The future for IBM resides in what it calls “Strategic Imperatives.” These initiatives, which include the AI initiative Watson and cloud operations, grew 12 percent over the past year and now account for more than 40 percent of total revenue.

Ongoing opacity makes it hard to say exactly what it means, though. IBM doesn’t break out Watson’s figures, for example, because it says it’s a “golden thread” weaving throughout the company. The Cognitive Solutions arm in which Watson is housed only grew 2 percent over the past year. All other divisions shrank.

The outlines of IBM’s cloud business are similarly misty. It generated $14.6 billion of revenue – and the services parts of it are expanding at nearly a 60 percent annual clip. An “exit run rate” the company provides for this business, however, is fuzzy, and it’s also hard to discern if it’s additional revenue. By comparison, Amazon Web Services, which is widely considered the industry leader, reported $12.2 billion of sales.

Google and Microsoft also are gunning hard to run the data centers and applications needed by companies big and small. The result is brutal price and technological competition. There’s no clear sign yet that IBM can keep up.


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