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Beating on both top and bottom line numbers — $700M over estimates for revenue and $.04 on earnings per share — IBM’s latest financial results demonstrate that the firm is clearly out of the woods now and focused on the future.
Interestingly, mainframe revenue drove IBM’s security offerings up an almost unbelievable 81 percent for the quarter. You remember the mainframe, right? That thing that was dead back in the 1980s? Well it is back. Companies often mistakenly conclude that a product is dead (I’m thinking of the Apple iPod) when it is just starved for support. I imagine there are a lot of firms that made fun of the mainframe that, given these results, now wish they had one of these gold-making machines.
IBM’s latest financials also highlighted several other parts of its business.
The Watson artificial intelligence (AI) platform is one of the most powerful engines for the future at IBM. It's a major part of IBM’s initiative to create an AI platform that enhances but does not replace humans (a topic we all likely should be far more interested in). Watson could redefine the next century, but it is facing increasing competition, particularly from startups focused on Watson’s initial medical market (confirming that market as a strong initial target). Growth was 6 percent, which is low given that this is largely a greenfield market.
However the issue is largely with the training time and system costs, which are getting a substantial amount of focus. Once they hit critical mass (likely in the next two years) in terms of trained systems, machine learning should allow IBM to grow this market at least a magnitude faster.
A few years ago, IBM wasn’t competitive with Amazon Web Services.
Well that was then, and this is now.
IBM Cloud revenue is up to $4.7 billion, and they are reporting 23 percent growth. With Amazon’s outages during their Prime Day displaying potential cloud weakness, IBM is in a good place to take additional share from the service that initially slapped them upside the head. Cloud revenue now accounts for nearly a quarter of IBM’s revenue, which is impressive given how short a period has gone by since that initial Amazon surprise.
For banking, blockchain has become the killer application. It assures the integrity of transactions in an industry that is often targeted with expensive fraud. It also shows just how much of IBM’s revenue is connected to their leadership positions in a number of security areas. While initially blockchain was almost exclusively connected to crypto currency, today it has broad applications across banking in everything but securities (where it continues to be too slow, but suggests an enormous potential investment in hardware to eventually address that shortcoming). IBM has established itself as the premier blockchain provider for banking and with 400 projects worldwide and 60 blockchain networks in some of the largest banks in the world, they remain the major player in this segment at scale.
Of late, the U.S. had been getting trounced in supercomputer performance, largely by China. This was particularly embarrassing because the United States established the segment and should have been decades ahead of anyone else.
While the $240 million Summit supercomputer wasn’t that relevant to IBM’s bottom line, it was incredibly relevant nationally as it took the performance lead back from China and returned it to the U.S. Given supercomputers are used to assure large scale national government projects ranging from weather monitoring to defense, U.S. leadership is extremely important. IBM, with NVIDIA’s focused help, returned leadership to the country. This also reestablished IBM as a global supercomputer leader, which was very important for the brand.
IBM remains the only company to have a universal quantum computer available in market. While quantum computing at scale is still some time off, IBM’s efforts in this area have established the firm as a leader. It should pay dividends once these things are truly ready for deployment in production.
While I don’t expect quantum computing to have a significant impact on IBM’s revenue this decade, it could well define the firm for the major part of the century. IBM is really the only firm in its class pushing this technology as hard as they are. With most firms focused excessively on quarterly profits, IBM stands out with massive strategic investments that assure its long-term survival. This is an important counterpoint to what I think is an industry mistake.
What IBM Is Getting Right
Behind the scenes, IBM has ramped up training and driven a refresh of nearly 50 percent of its workforce over the last six years. This has worked impressively well to rebuild the company for the emerging market of tomorrow. The firm stands in stark contrast to the more traditional quarterly revenue focus that plagues the public companies in general. The long-term focus should help ensure that this company, which was designed to last centuries, meets its founder’s immortal goals.
This quarter was an impressive piece of work from a company that, historically, has set records for longevity and execution. It is once again stepping up to this IBM-level challenge. The executive team and a board (made up largely of CEOs from IBM customer companies) set a strong positive standard in a massively changing market.
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