IBM Cloud Identity Takes Shape, But Overall Revenue Flat

Cloud is a bright spot in IBM's first-quarter earnings, but the overall bottom line isn't. The company is evolving, but is it evolving fast enough?

Jason Verge

April 22, 2015

3 Min Read
IBM Cloud Identity Takes Shape, But Overall Revenue Flat
IBM CEO Ginni Rometty delivers a keynote at 2014 Mobile World Congress. (Photo: IBM)

IBM believes the cloud market is starting to bifurcate between low-end commoditized cloud and higher-profit enterprise cloud. The company has reinvented itself several times in its history, but its focus has long remained on the enterprise.

While IBM cloud revenue was impressive, its overall first-quarter revenue, reported this week, was flat year over year. A glance over financials for its multiple business lines reveals the word “down” far more than “up.”

The company announced its cloud service revenue grew more than 75 percent in the first quarter, propped by larger-sized enterprise deals centered on analytics. Its rolling 12-month cloud revenue is now more than $7.7 billion. The “as-a-Service” revenue is $3.8 billion, up from $1.5 billion last year.

Cloud is a bright spot, but evolution is painful. It’s arguably why fellow tech giant Dell went private, because the books are never pretty during times of sweeping change.

It’s hard to gauge if IBM’s evolution is a success because of lack of overall revenue growth, but the need to evolve is unquestionable. Enterprise IT is moving towards an “as-a-Service” model, but that business has to come from somewhere.

A historical parallel is big telecoms trying to deal with wireline loses in the aughts. Two types of telecoms emerged as people ditched wired phone lines en masse: the transitory telecom looking to other buckets and the consolidator propping up wireline revenues through buying assets on the cheap.

Would it have been wiser to invest in a wireline-heavy company with rising overall revenue or a company with flat to modestly shrinking overall revenue with the mix shifting away from wireline? It's hard to argue that in the long term the former wins over the latter. The same applies to enterprise tech companies and legacy enterprise software businesses.

IBM is undergoing transition, making several billion-dollar investments in cloud, including $1.2 billion on new data centers housing cloud and a billion on its Platform-as-a-Service Bluemix. Six new data centers are expected in 2015. It is investing in its evolution.

Its recent deals show that IBM knows its identity in the cloud world. There is a market split occurring between commodity cloud and high-value cloud, and IBM’s recent deals exemplify that split.

Two larger deals signed by IBM in the quarter were ShopDirect, one of the largest retailers in the U.K., and the Weather Company, which provides weather data to all kinds of companies and businesses. Both companies employ a public Infrastructure-as-a-Service provider in addition to IBM. IBM comes in because of a need to do advanced analytics.

ShopDirect is using IBM cloud to understand mobile buying patterns to customize offerings, while Weather Company is looking at data from millions of sensors and tailoring to specific industry needs, such as insurance and retail.

Other recent deals with the U.S. Army, Marriott Hotels and Coca-Cola are hybrid style deals, combining IBM analytics cloud with commodity IaaS or existing IT systems not necessarily "owned" by Big Blue.

The biggest public cloud players are playing at both ends of the market and still pose a threat, despite a clearer cloud market split. Both Amazon Web Services and Microsoft Azure have released features targeted at startup developers and enterprises, while Google and VMware partnered to the same end. AWS has recently gone as far to say that they want to win the entire enterprise data center.

IBM's investments reveal faith in the transition, and that the company is finding its niche in the cloud market with enterprise services and analytics. However, it's growth in cloud will need to offset shrinking buckets, and the transition needs to happen in the organization in addition to the revenue.

"In the first quarter we had a strong start to the year,” said Ginni Rometty, IBM chairman, president, and CEO, in a press release. “Our strategic imperatives growth rate accelerated, demonstrating the power of our offerings in these new opportunities and contributing to improved revenue performance. Our focus on higher value through portfolio transformation and investment in key areas of the business drove continued margin expansion.”

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