Tuesday, May 24, 2022

IBM’s Earnings Show Advantages of Shifting Away From Hardware

IBM is a company designed to survive market changes and the kinds of problems that stifle much of the tech industry today. 

Before he left the company, Thomas Watson Jr. articulated a strategy of focusing on what IBM was at its core, while allowing every part of IBM to change rapidly as needed to adjust for world and market events. This strategy means that IBM goes through massive operational and organizational changes far more aggressively than its peers to assure the company’s long-term health and success. The latest IBM financials again prove the power of this executive strategy, by posting significant financial strength in every segment in which IBM is active.  

Unlike many of its peers, IBM isn’t overly focused on quarterly results so much as on its plan to be around for its next centennial anniversary. And this month’s Q421 results showcase that this strategy is still working

Let’s explore some of the details:

See more: How IBM has Changed to Become What It Once Was

IBM’s revenue is up across segments

IBM was once known as a hardware company, but over the last several decades, the company has been shifting its focus from hardware and global services to software, cloud, consulting, and infrastructure. The result is that while logistics problems crippled many companies, IBM has demonstrated strong growth in every segment but infrastructure, which grew but modestly.

Overall growth in a pandemic- and logistics-challenged year was (in constant currency year over year) at 8.6%, but cloud revenue grew an impressive 18%, software at 10%, and consulting at 16%. Infrastructure grew but at 1.7%, which is where the pandemic appears to have had the greatest impact on the company.  Some other interesting growth statistics are that security revenue only grew 5%, but automation grew an impressive 14.6%, and transaction processing (a long-time IBM strength) at 14%.  

Looking into the slower growth for infrastructure, it appears IBM Z is in a slow decline with a 4% drop in revenue, again showing IBM’s wisdom in shifting away from hardware to more high-growth areas. Distributed infrastructure did surprisingly well with 7% growth, thanks to storage and the Power10 launch, suggesting IBM’s more recent strategy of focusing on infrastructure solutions rather than individual products is paying off.

Finally, while IBM has had poor merger performance in the past, its recent Red Hat acquisition outgrew every other metric with 21% growth. Red Hat has been impressively successful by showing strong benefits nearly from day one, demonstrating that IBM’s acquisition skills might have improved.  

See more: Cloud Q&A With Briana Frank of IBM Cloud: Trust is the ‘Key Missing Piece’ for Many Providers

IBM emerges from restructuring

Except for infrastructure and security, every other major business group reported double-digit revenue growth in constant currency for the year. Red Hat, one of IBM’s strongest acquisitions in years, put the candles on the cake by outperforming the rest of IBM in terms of growth.  

Software in IBM was historically subordinate to hardware but often outperformed it by a significant margin. Under IBM’s new leadership, software now stands outside of hardware’s shadow and is doing far better as a result. 

IBM’s approach to the cloud is also paying dividends. IBM doesn’t compete with the major cloud players but focuses instead on multicloud tools and a secure cloud option to embrace the need for companies that don’t want all their eggs in one basket. This approach to cloud resulted in an especially impressive 32% year-over-year growth in cloud consulting revenue, as IBM’s customers focus on making a multicloud strategy work to shield themselves from any one cloud provider’s execution or operational problems.  

IBM is accelerating on its new path

We are entering what many believe is the 4th Industrial Revolution. When this happens, a lot of companies typically fail because they are unable to pivot quickly enough to the new business models.  

IBM has been around for over 100 years and has been through a number of these revolutions in its lifetime. So it’s no surprise that it’s better than most at figuring out early how to reposition itself to avoid the pitfalls and capitalize on the benefits of this massive change.  

IBM’s latest financials prove that its business strategy is still strong, and IBM remains likely to finish this century much like it finished the last: as a changed and successful company focused on the new future. They also show that in a pandemic, with logistics issues, a strategy of focusing on non-hardware businesses, which don’t have logistics risks, looks to be particularly successful. IBM’s new CEO, Arvind Krishna, also continues to impress. 

See more: IBM: Cloud Portfolio Review

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