Blame legacy systems and mainframes for Big Blue’s quarterly revenue decline as it continues shift to cloud and services
IBM posted its third consecutive quarter of declining revenue as sales across most of its portfolio in the first quarter of 2019 were down compared to the same period last year. While the red ink is disconcerting, IBM and analysts believe the outlook for IBM’s strategic plan — particularly after it closes the Red Hat acquisition — is positive.
The Lowdown: Wall Street expected IBM to post quarterly revenue of $18.5 billion for the first three months of 2019. Instead, Big Blue came in light, at $18.2 billion, with performance dragged down by significant drops in mainframe systems and margin declines in emerging and strategic technologies.
The Details: IBM reorganized its reporting structure, consolidating some business units into more logical groupings. The bright spot remains cloud computing and cognitive systems, which represent nearly one-third of IBM’s annual revenue. That business was down only 1.5% year-over-year even as bookings increased. The Global Technology Services unit was down 7%; the Global Business Services unit was down 11%; and the Systems unit, which includes IBM’s Z Series mainframe, was down 38%.
The Impact: IBM is banking on the divestment of underperforming and non-core business units while investing in emerging technology and developing its cloud computing business. Analysts expect the acquisition of Red Hat will provide Big Blue with new capabilities for migrating and managing accounts in public and hybrid cloud environments. IBM announced the $36 billion bid to buy the open-source powerhouse in October 2018; the deal will likely close in the second half of 2019. Without the Red Hat deal in place, analysts say the market would view IBM’s first-quarter performance with far more skepticism.
Background: Over the past five years, IBM struggled to transform its company from a laggard in cloud computing and automated services. While revenue productivity continues to slip, IBM sees much potential from its investments in cloud computing, artificial intelligence and cognitive computing, security, analytics and Big Data, and mobility. More than half of IBM’s annual revenue now comes from strategic initiatives. While IBM reports more than $19 billion in annual revenue from various cloud services, it remains a laggard in public and hybrid clouds compared to market leaders Amazon Web Services, Microsoft, and Google.