The forces behind IBM’s earnings doldrums

Ginni Rometty - CEO, IBM

On 18 July, IBM revealed accelerated year-on-year revenue declines in its latest quarterly financials, reporting a drop of five per cent to US$19.3 billion for the three-month period.

Off the back of this revenue, the company reported net quarterly operating income (non-GAAP) of approximately US$2.8 billion, representing a year-on-year contraction of roughly two per cent.

The declines came despite a reported five per cent year-to-year increase in revenue from strategic imperatives and a 15 per cent year-to-year increase in cloud revenues, indicating revenue challenges to more traditional business units drove the overall quarterly revenue declines, according to analyst firm, Technology Business Research (TBR).

“In fact, despite reported gains in these strategic portions of IBM’s business, the vendor experienced year-to-year revenue declines across all five of its major business units,” TBR research analyst, Stephanie Long, said.

Long highlighted IBM’s Systems segment as being a remaining driver of the company’s revenue challenges in 2Q17, falling a reported 10 per cent year-to-year to $1.7 billion.

That said, Long suggested that the July launch of IBM’s z14 mainframe offering will support revenue gains in 2H17.

Despite the recent declines, IBM chairman, president and CEO, Ginni Rometty, has talked up the company’s latest figures while focusing on expanding segments.

"In the second quarter, we strengthened our position as the enterprise cloud leader and added more of the world's leading companies to the IBM Cloud," Rometty said. 

"We continue to innovate, adding regtech capabilities to our portfolio of Watson offerings; developing solutions based on emerging technologies such as Blockchain; and reinventing the IBM mainframe by enabling clients to encrypt all data, all the time,” she said.

At the same time, however, the company’s overall services revenue declined 4.8 per cent, year-to-year in 2Q17, the steepest drop since 4Q15.

According to TBR senior analyst, Jennifer Hamel, IBM’s Global Technology Services (GTS) struggled with a lull between two major contract wind-downs, announced in the prior quarter, and the ramp-up of recent large-scale cloud migration signings such as Lloyds Banking Group in the UK, as well as the ongoing shift away from low-margin IT outsourcing services.

“Global Business Services (GBS) showed improvement in Consulting attributable to its realigned practice model and recovering backlog, but declines in legacy application and BPO [business process outsourcing] services continued to offset growth higher-value digital areas,” Hamel said.

Hamel flagged that TBR expected IBM’s services realignment to continue through 2H17, as the company applies its cognitive-enabled IBM Services Platform to drive delivery efficiencies in GTS and provide an “on-ramp” to more lucrative digital engagements led by GBS and IBM’s Cognitive Solutions businesses.

“Bringing these pieces together will be critical for IBM build more strategic client relationships that sustain revenue opportunities long after clients migrate to cloud,” she said.