In the midst of one of the greatest enterprise-tech markets ever, why does IBM have 4 zero-growth businesses with tenuous or even flimsy connections to its core future strategy of hybrid-cloud platform?
Hey—in a way, I get it. We’ve all got that ugly old sweater that we just can’t bear to part with, or that old clunker of a car that bleeds oil and often fails to start but, well, just might come in handy sometime for some reason you can’t fathom.
But as IBM embarks on a future that CEO Arvind Krishna has said will be devoted to being the world’s leading open hybrid-cloud platform, why is the company continuing to drag along 4 businesses that would appear to require a Rube Goldberg machine to connect them to that hybrid-cloud strategy?
Dear CEO: keep cutting!
As I wrote recently in An Open Letter to IBM CEO Arvind Krishna: Keep Swinging that Axe!, it’s great that Krishna is unloading the managed-infrastructure business into a separate company to help IBM focus more intensely and successfully on its cloud future—but there’s still much work to be done.
So with additional evidence from the Q3 financial results that IBM released yesterday, I’d like to propose that IBM either put these 4 businesses on the chopping block or, in the case of one of the four, revise its strategy and/or bring in new management.
1. Cognitive Applications
How is it that IBM, whose Watson AI technology appeared to be many years ahead of anything any of its competitors could put together, is scrambling for AI relevance here in late 2020 as AI becomes an essential and increasingly commonplace ingredient in the global economy?
Starting with yesterday’s Q3 numbers and working backwards, here are revenue and growth figures for IBM’s self-styled “Cognitive Applications” business for the past 7 quarters going back to Q1 2019:
- Q3 2020: $1.3 billion, flat
- Q2 2020: $1.2 billion, -8%
- Q1 2020, $1.2 billion, -3%
- Q4 2019, $1.6 billion, 1%
- Q3 2019, $1.4 billion, 6%
- Q2 2019, $1.5 billion, 5%
- Q1 2019, $1.3 billion, 4%
Now, that average quarterly revenue growth for Cognitive Applications back in calendar 2019 of 4% might seem fairly chintzy here in the AI Age, but compared to its tumbling numbers here in 2020, last year is looking like a banner performance.
This is the one business among the 4 laggards that seems to be worth keeping because it is rooted in one of the most-transformative and vital technologies—AI—we’ll ever live to see. (Ah yes, but leave it to IBM to deliberately *avoid* using the name “AI” and instead go with the loftier “cognitive technology” that even IBM openly admits means the same as artificial intelligence!)
If there’s a strategic tie-in here to the hybrid-cloud strategy, then by all means IBM should make that case. And since the current strategy for “Cognitive Applications”—whatever that strategy may be—is yielding declining revenue, might I suggest a new tack for this business?
2. Transaction Processing Platform
Is it tied to hybrid cloud? You tell me. But I’ll tell you this: its revenue figures and growth/decline percentages over the past 7 quarters make the figures for “Cognitive Applications” look positively Zoom-like by comparison.
- Q3 2020: $1.5 billion, -9%
- Q2 2020: $1.7 billion, -14%
- Q1 2020: $1.5 billion, -15%
- Q4 2019: $2.5 billion, up 4% (growth spurt!)
- Q3 2019: $1.6 billion, -4%
- Q2 2019: $2.0 billion, 4%
- Q1 2019: $1.8 billion, flat
As with the Cognitive Applications, while 2019’s performance was mostly a stinker, 2020’s is even worse. And when next quarter’s numbers come out and IBM has to try to reach that high-water comparison mark of $2.5 billion in Q4, good luck with that.
Is there any possibility 2021 will suddenly be better?
3. Power Systems
Yeah, yeah, I know, the reason for keeping this line of non-mainframe systems is that IBM is about the only company in the world still making mainframes (System Z), and every once in a while they make a lot of money, so since IBM is making mainframe hardware, it’s not all that strange for it to make relatively small systems like Power as well. Right? Make sense to you?
Can you see the glaring connection to hybrid-cloud platform?
Now brace yourself for some truly ugly growth/decline percentages for Power Systems for the past 7 quarters (IBM does not break out revenue for Power, Z, or Storage):
- Q3 2020: -16%
- Q2 2020: -28%
- Q1 2020: -32%
- Q4 2019: -23%
- Q3 2019: -27%
- Q2 2019: 3%
- Q1 2019: 9%
So since the glory days of the first half of 2019 when Power revenue grew 6%, Power revenue has fallen an average of 25.2% per quarter.
Enough about that.
Hey, everybody needs more and more storage, right? Gotta be a winner here, right?
Well, there’s good news and bad news, and the upshot is this: when IBM Storage revenue is not declining significantly, then it’s mostly kinda/sorta flat with the exception of a big quarter at the beginning of this year. Got that?
Okay, here are the figures for revenue ups or downs for storage—in the age of Snowflake, does this look like a keeper to you?
- Q3 2020: -20%
- Q2 2020: 3%
- Q1 2020: 19% (!!)
- Q4 2019: 3%
- Q3 2019: -4%
- Q2 2019: -21%
- Q1 2019: -11%
So: storage had 3 straight quarters of growth, then seems to have fallen off the table in Q3.
Do these businesses and will these businesses help Arvind Krishna and company become highly significant and strategic players in the cloud?
Or, are they being kept around because they bring in lots of cash (roughly $15 billion annually) and keep some lights on? (Wait a minute—in these days of WFH, does “keep the lights on” mean anything anymore??)
Do they help IBM focus rigorously on Krishna’s stated mission expressed in this statement from the Q3 earnings charts (slide 4):
“Separating the managed-infrastructure services business creates a market-leading standalone company and further sharpens our focus on IBM’s open hybrid cloud platform and AI capabilities. This will accelerate our growth strategy and better position IBM to seize the $1-trillion hybrid-cloud opportunity.”
I believe IBM needs more of that “sharpens our focus” thing offered by Krishna.
And the sooner the better.
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