IBM May Finally Stop Shrinking. But Is It a Turnaround?
Posted January 17, 2018 8:26 p.m. EST
Updated January 17, 2018 8:31 p.m. EST
For 5 1/2 years, nearly the entire tenure of its chief executive, Virginia M. Rometty, IBM has reported a steady erosion of revenue.
Selling off its chip manufacturing and smaller data-center computer businesses contributed to the decline. So, too, did the fact that new businesses like cloud computing, data analytics and artificial intelligence had not yet grown big enough to make up for the downturn in IBM’s traditional hardware and software products.
But IBM’s half-decade losing streak will most likely end Thursday, analysts predict, when the company reports its quarterly performance.
The crossover to growth would be a long-awaited bright spot for Rometty and IBM, a challenged giant that has been overshadowed in recent years by the younger technology giants on the West Coast.
Even if IBM delivers a revenue gain, however, the bigger question facing the company remains: Has Rometty turned it around?
Skeptics abound. IBM is expected to have gotten an extra lift in the most recent quarter from currency gains and strong sales of a new line of mainframe computers. Without that help, the company’s revenue would decline by 2 percent or so, according to an estimate from A.M. Sacconaghi, a financial analyst for Sanford C. Bernstein.
“Is a turnaround afoot? I don’t see it yet,” Sacconaghi said.
There is no doubt, though, that there are signs of progress at IBM, which would not comment on its financial picture before the release of the earning report. So much attention is focused on the company’s top line because revenue is the broadest measure of the headway IBM is making in a difficult transformation toward cloud computing, data handling and AI offerings for corporate customers.
The new businesses — “strategic imperatives,” IBM calls them — now account for 45 percent of the company’s revenue. And though it still has a ways to go, IBM has steadily built up those operations — and gained converts.
The number of software developers using its cloud technology has doubled in the last year, IBM says, though it would not provide numbers. On Wednesday, Barclays upgraded IBM’s stock to a buy and noted its long-term opportunity in the cloud market. IBM’s stock price, a notable laggard as markets have surged in recent years, has climbed nearly 10 percent so far this year.
IBM was slow to recognize the significance of cloud computing and software tools delivered as Internet-style services. In artificial intelligence, the company scored a research and public relations triumph in 2011, when its Watson system defeated human champions in the question-and-answer game, “Jeopardy!” But IBM first applied the Watson technology to the daunting realm of cancer research, a lengthy struggle with little short-term financial reward.
Today, IBM trails well behind Amazon Web Services and Microsoft in the cloud market, according to analysts. Yet IBM has invested heavily in more than 60 cloud data centers in 19 countries in the past three years. And the most recent analysis by IDC, a technology research firm, and a report last month by Jefferies, a Wall Street firm, ranked IBM third in the category, ahead of Google.
The Watson technology has been retooled as dozens of services including text understanding, language translation, image recognition and sentiment analysis — all delivered via the cloud and available a la carte.
IBM’s strategy is to offer businesses cloud computing, AI technology and industry expertise tailored for each customer. Big companies, said David Kenny, senior vice president for IBM’s Watson and cloud businesses, are adapting cloud and AI technology to make their businesses faster and smarter.
“We start from our strength in knowing how enterprises operate,” Kenny said. “We’re a trusted partner for companies in this data and AI wave.”
Companies want to move quickly, Kenny said, but they often want to exploit the speed and flexibility of cloud technology from within their own computer centers, where they figure their vital business data is more secure. AT&T began a project with IBM last fall to accelerate the use of cloud technology in developing and updating the telecommunications giant’s 2,200 in-house software applications. IBM — a longtime technology supplier to AT&T — was chosen both for its cloud expertise and its industry knowledge, said Sorabh Saxena, AT&T’s president of business operations.
The AT&T-IBM collaboration involves breaking down programs into cloud-based building blocks of code called microservices, each of which handles a certain task. So a new feature for mobile payments, for example, can be adopted quickly by updating a few lines of code rather than having to rewrite an entire program.
Most of this business software uses cloud technology that runs inside AT&T data centers — in a so-called private cloud, in contrast to a public cloud in which computing services are delivered from remote data centers owned by another company. Many corporations opt for private clouds to house their most sensitive customer and business data.
“For certain parts of our business, IBM was the ideal partner,” Saxena said.
IBM emphasizes its hybrid stance in the cloud market, offering both private and public cloud technology to its corporate clients. In its financial reporting, IBM also includes all the hardware, software and services it sells to companies to build private clouds in its total cloud revenue, which would put it on a par with Amazon.
Most industry analysts focus on the public cloud market, assuming it will grow faster as companies build fewer data centers themselves. In the public cloud market, IBM has revenue of about $2 billion a year, growing at 30 percent, according to the most recent estimate by IDC. By contrast, Amazon generates more than $12 billion a year and Microsoft about $6.5 billion.
Yet for IBM, its underlying cloud software is crucial to building a big AI business with Watson. “IBM has a strong set of assets in AI,” said Ed Anderson, an analyst at Gartner. “And cloud is the answer to getting Watson in the hands of developers.” That was the appeal for Opentopic, a startup that uses AI technology to mine online and corporate data for marketing insights. Opentopic switched from Amazon Web Services to the IBM cloud in 2015, largely to tap Watson’s code modules for text, image and sentiment analysis, so the Opentopic developers had to write less code themselves.
“It allows us to prototype rapidly,” said Andre Konig, a co-founder of Opentopic. “And Watson is the artificial intelligence layer that makes that possible.”
The startup’s clients include Unilever, Abbott Laboratories and The Economist. Today, Opentopic does all its software development on the IBM cloud, but that will most likely change soon.
It is working with a new company that runs its business on the Amazon cloud. “We need to be where our customers are,” Konig said. “The future is going to be multi-cloud,” meaning businesses will use various services.
His comment points to a brewing issue for IBM — and perhaps one that will help determine the resilience of Rometty’s turnaround campaign.
IBM is putting all its advanced technology on the cloud — not just artificial intelligence, but also blockchain and quantum computing. If others are leaders in the underlying cloud layers, why not focus higher up and distribute its leading-edge technology on other clouds as well?
IBM says its Watson software, for example, is fine-tuned down to the chip level for the IBM cloud. But some analysts suggest that IBM may eventually take another path, working with Amazon, Microsoft and Google.
“If IBM does that,” said Frank Gens, IDC’s chief analyst, “its chance of being a cloud leader goes way up.”