IBM – the future is in the cloud

IBM, a traditional IT legacy company, is in the mist of change; the landscape has changed and the company must adapt in order to continue to be successful. Adapting to this new environment the company must shift focus away from consulting, design, and implementation of one-off IT systems and into cloud services.

Under Ginni Rometty, IBM has rapidly shifted its business portfolio, investing in what she calls a number of “strategic imperatives” comprised of Watson, cloud, security, services, systems, commerce, and analytics.
IBM has reported promising growth in their strategic imperatives, but the company’s transition is far from over and the company continues to struggle. On a positive note, the fourth quarter results, at close examination, are not as bad as they may appear at first glance.

IBM’s fourth quarter earnings report showed declining revenue and profits, to be expected for a company in a major transition. Revenue fell for the eleventh straight quarter to $24.1 billion, well below the $27.7 billion in the year-earlier quarter and the $24.8 billion that Wall Street expected. Net income slid to $5.5 billion, down 11% from the same quarter a year earlier. Why did this happen? The decline in revenue was anticipated as it reflected the divestiture of System X and Customer Care. Together, they had $1.6 billion of revenue in the fourth quarter of 2013, and currency movements registered about a $1.2 billion negative impact. If currency and getting rid of loser businesses is factored out, IBM’s revenue was actually in line with expectations.

IBM also announced the divestiture of its semiconductor manufacturing business. The three businesses it divested contributed $7 billion to revenue in 2013, but they lost about half a billion dollars. While net income decreased, the company’s profit margins increased and operating margins ended up above Wall Street estimates.

IBM has also been active in the partnership area. Apple Inc., Twitter, Inc., and SAP are IBM’s most important ones to date. IBM and SAP partnered together to offer cloud-computing services to companies. IBM provides infrastructure services and SAP runs its business applications on top of them.

IBM also uses Twitter’s data to help enterprises understand their customers, businesses, and other trends. Twitter data will be integrated into IBM’s big data analytics tools and added to BlueMix. This will allow businesses to write enterprise apps that include Twitter data. The company intends to train 10,000 consultants (IBM’s numbers are never small) to write custom enterprise apps that use Twitter data.

IBM’s partnership with Apple is crucial and promising. The two companies are offering solutions to businesses that use iPads with custom software. They released their first 10 apps in December, have twelve more planned to be released this quarter, and over 100 apps planned. The first 10 apps were for vertical industries, such as a flight planning app for airlines and a customer service app for insurance companies. Now, they are working on horizontal apps that any business could use. One example is a supply chain app, which helps companies match how much product they expect to sell with how many materials they order.
Conclusion

IBM is currently undervalued due to negative sentiment surrounding the stock. IBM is doing all the right moves to transition the company from a legacy IT custom-solutions company to a flexible, modern, cloud-based services organisation. IBM’s potential is vast and may be an excellent investment for an investor that has a long-term view.

 

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