Amid Poor Results Overall, IBM’s Cloud Business Growing

CFO says poor performance expected and necessary as company builds platform for next-gen IT services

Yevgeniy Sverdlik

October 20, 2015

4 Min Read
IBM 2009 CeBIT
A young woman walks past the IBM logo at the 2009 CeBIT technology trade fair in Hanover, Germany. (Photo by Sean Gallup/Getty Images)

IBM now makes $4.5 billion in revenue from cloud delivered as a service – that’s separate from private cloud infrastructure it helps customers set up in their own data centers – which is less than Amazon Web Services’ $7.3 billion 12-month revenue run rate but 45 percent more than IBM’s own cloud revenue one year ago.

Good news was scarce in IBM’s third-quarter earnings report released Monday, and its cloud business growth was one example. The company continues to see revenues shrink across all of its business segments, leading it to lower expected full-year earnings for 2015 to between $14.75 and $15.75 per share.

The upper end of the new range was the lower end of the previous one, which was between $15.75 and $16.50.

On a call with analysts, IBM CFO Martin Schroeter reiterated that this was all to be expected. The company is going through a transition, repositioning itself for the future it says will be dominated by cloud services and Big Data analytics.

“We always said this would play out over time,” Schroeter said. “This is a longer-term play. We’re creating new platforms and building ecosystems.”

IBM’s total revenue for the third quarter was $19.3 billion, which is 14 percent down year over year, but only if you don’t take into account that IBM still had its x86 server business one year ago. Adjusting for the sale of the System x unit to Lenovo in September 2014 and currency fluctuations, Big Blue’s revenue was down only one percent year over year.

IBM reported Earnings Per Share of $3.02 – down 9 percent year over year. IBM stock was down almost 5 percent in afterhours trading on Monday following the earnings announcement.

Transforming Enterprise IT, One $1B Contract at a Time

Schroeter highlighted several recent customer wins that according to him illustrate where the business of providing IT infrastructure services to enterprises is headed. “We take over their IT systems and move them to the cloud,” he said.

IBM’s $700 million contract with Abu Dhabi’s Etihad Airways is for a wholesale transformation and outsourcing of the airline’s infrastructure to IBM. It includes a new data center in Abu Dhabi, which will be built and operated by IBM, as well as cloud-based services, such as analytics and IBM’s “cognitive computing” capabilities that go by the name Watson.

It also includes a mobile solution for Etihad, developed by IBM and Apple, and transition of 100 Etihad IT employees to IBM.

IBM has a similar outsourcing contract with the German airline Lufthansa. The seven-year €1 billion contract was signed last year.

Another recent customer win Schroeter highlighted was a $1 billion outsourcing deal with Evry, a Norvegian IT services company. The 10-year agreement also calls for transformation of the customer’s IT infrastructure, including cloud services hosted at IBM’s SoftLayer data center outside of Oslo.

Only Two Segments up Year on Year

Global Technology Services, the segment that includes IBM’s cloud services, was one of two segments that reported increases in revenue in the third quarter, albeit GTS’s increase was only 1 percent. The other growing segment was Global Financing, whose revenue grew 7 percent year over year.

Results from the remaining three segments:

  • Global Business Services: down 5 percent

  • Software: down 3 percent

  • Systems Hardware: down 2 percent

Systems Hardware revenue was down because of poor sales of storage systems. IBM recorded a 20 percent increase from sales of z Systems (the mainframes) and a 2 percent increase from sales of Power Systems (the high-end servers powered by Big Blue’s Power processors), which was not enough to offset a 14-percent year-over-year drop in storage sales.

Storage represents about 34 percent of IBM’s total hardware-revenue pie.

IBM’s future clearly depends on its ability to continue raking in big IT outsourcing contracts as it has done for many years, only now these contracts will also include its vast array of cloud services, including Infrastructure-as-a-Service offerings called SoftLayer, Platform-as-a-Service offerings called Bluemix, and advanced data analytics capabilities.

The likes of AWS and Microsoft Azure may be actively pursuing enterprise data center workloads, but IBM has a lot to offer to enterprises that cannot deploy all of their applications in public clouds with its pitch of a hybrid infrastructure that can combine on-prem data centers with cloud services, all managed by one vendor.

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