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How do you solve a problem like IBM<\/a>?<\/span><\/p>\n Yesterday evening the company reported its 20th straight consecutive quarter of year-on-year losses. The company\u2019s quarterly earnings beat expectations, but that wasn\u2019t enough to save the share price.<\/span><\/p>\n As a result shares plummeted in after hours trading and refused to gain ground over the course of the day dropping nearly 5%, or over $8.<\/span><\/p>\n As<\/span> the Motley Fool noted<\/span><\/a>, the miss and resulting tumble erased nearly $9 billion from IBM\u2019s market capitalization and brought the Dow Jones Industrial Average down by 64 points.<\/span><\/p>\n The problem for IBM is the dwindling value of the consulting business on which it built much of its fortunes in the 90s and early 2000s.<\/span><\/p>\n First, the big numbers. Earnings per share were $2.38 vs. expectations of $2.35, according to Thomson Reuters. Meanwhile, revenue fell to $18.16 billion compared with the $18.39 billion that \u201cthe street\u201d expected.<\/span><\/p>\n The Big Numbers<\/strong><\/p>\n That\u2019s a 1 percent gain in earnings per share, and a 3 percent decline in revenue from a year ago, the company said.<\/span><\/p>\n There are bright spots. The company\u2019s cloud business is booming with revenues of $3.5 billion, marking growth of 33% over last year\u2019s numbers.<\/span><\/p>\n What\u2019s concerning to analysts is that the revenue numbers may track with Amazon\u2019s in terms of revenue, but AWS and Azure are growing at a faster clip \u00a0(AWS business is growing at 47% according to the most recent numbers).\u00a0<\/span><\/p>\n And as a friend of mine put it on Facebook \u201cWhen you spend 100s of millions on the cloud and are handily beaten by a bookstore that wasn\u2019t even trying, that\u2019s not a good sign.\u201d<\/p>\n Still, fans of big blue can take heart in that its \u201cstrategic imperatives\u201d businesses (around which IBM began restructuring in 2015), are beginning to show some growth.<\/span><\/p>\n Revenue at that business segment increased 12 percent to $7.8 billion the company said (not adjusted for currency). And the company\u2019s cognitive solutions business grew to $4.1 billion, or over 2%.<\/span><\/p>\n IBM chief executive, Ginni Rometty said that the strategic imperatives business lines accounted for over 40 percent of total revenue for 2016, earlier this year.<\/span><\/p>\n Where the hurt happened<\/strong><\/p>\n Losses were mainly in the legacy businesses like consulting and sales from hardware and infrastructure equipment (to be expected since the cloud computing business essentially cannibalizes hardware sales).<\/span><\/p>\n And, IBM also spent a bit more on research and development in the last quarter, with that number ticking up to $1.53 billion from $1.46 billion in the year ago period. It\u2019s a number that still lags behind the biggest tech companies.<\/span><\/p>\n IBM\u2019s R&D department was famous for decades for churning out impressive technologies, and the \u201cBeast from Armonk\u201d (no one actually calls it that) needs to reclaim some of that mantle if it\u2019s going to continue to compete with the Microsofts, Googles, and Amazons ofthe world \u2014 let alone the Huaweis and Alibabas.<\/span><\/p>\n IBM isn\u2019t new to makeovers. Since its founding over 100 years ago, IBM has made several, radical changes to its business over the years. It<\/span> sold its computer business to the Chinese manufacturer Lenovo<\/span><\/a> in 2005 in a $1.75 billion deal \u2014 and nearly a decade later sold its server business to Lenovo for another $2.1 billion.<\/span><\/p>\n It\u2019s all part of the restructuring process<\/span> that was begun decades earlier<\/span><\/a> under IBM\u2019s first outside chief executive Louis Gerstner, who came to the company from RJR Nabisco (in retrospect, maybe bringing in someone from RJR Nabisco to run IBM wasn\u2019t the best idea).<\/span><\/p>\n What \u201cthe Street\u201d Wants<\/strong><\/p>\n All of this comes as analysts are looking hard at the restructuring Rometty began two years ago. According to<\/span> a Barrons report<\/span><\/a>, one of the big sources of concern for analysts was the company\u2019s gross profit margin. Barrons cited a report from Morgan Stanley analyst Katy Huberty, at Morgan Stanley:<\/span><\/p>\n We view gross margins as the cleanest read on IBM delivering leverage on the back of heavy investments during 2015-16. If we don\u2019t see meaningful strides toward Y\/Y gross margin stability across most segments later this year, we see the risk that IBM returns to low-end of software peer multiples, represented by our $142 bear case.<\/span><\/em><\/p>\n<\/blockquote>\n So gross margins are putting pressure on a business that needs to start showing real revenue growth if it\u2019s to remain competitive.<\/span><\/p>\n IBM can\u2019t rely on stock buybacks and other financial shenanigans to inflate the stock price and make itself appealing to investors.<\/span><\/p>\n As I\u2019d said, there are bright spots. The sexier businesses around security, cognitive computing, cloud computing et al. are getting customers, but how long that happens depends on IBM\u2019s ability to do more than rest on its laurels.<\/span><\/p>\n As one of the oldest and most storied technology companies in the U.S. it\u2019s hard to watch Big Blue stumble\u2026 But<\/span> there are plenty of bullish analysts<\/span><\/a> who think that Rometty can right the ship\u2026 if she\u2019s given a enough time to do it.<\/span><\/p>\n Featured Image: Ethan Miller\/Getty Images<\/small><\/p>\n","protected":false},"excerpt":{"rendered":"![\"\"](\"https:\/\/www.theatlas.com\/i\/atlas_N1Gs8E4v.png\")
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How do you solve a problem like IBM? Yesterday evening the company reported its 20th straight consecutive quarter of year-on-year losses. The company’s quarterly earnings beat expectations, but that wasn’t enough to save the share price. As a result shares plummeted in after hours trading and refused to gain ground over the course of the day dropping nearly 5%, or over $8. As… Read More<\/a><\/p>\n\n<\/img><\/a>
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