IBM released their FY2013 Q1 numbers on the 18th of April, 2013.http://www-03.ibm.com/press/us/en/pressrelease/40878.wss Overall the results disappointed the market. For me, it reinforced just how hard the traditional technology business is, and the transformation that is required just to stay even.
Currency adjusted, total revenue was down 3%. Clearly that masks the overall dynamic. The core interest is how the individual sectors fared in the quarter.
Note, all numbers quoted are for currency adjusted. Software currency adjusted was up 1%, services -1%, so basically flat for the quarter. The key bright spot for Services was that forward bookings was up 5%.
Systems and Technology (servers, Storage, Mainframe) fell 16% in the quarter. This is a brutal result for IBM. It highlights a number of issues. The first is that the IBM portfolio is increasingly operating in markets functioning at different speeds. This makes business tough for management, sales and execution. One strategy does not fit all.
Clearly the other issue is that the fall in PC sales (Of course, a market that IBM is no longer part of) is not the only indicator of the complete transformation of technology procurement and demand. Hardware is as much, if not more vulnerable. We saw this with Oracle/Sun numbers which were even worse at -22%. By comparison, HP numbers were -6%. HP will take that as success. As far as vendors are concerned, the demand model is broken, and there is no quick fix for IBM, Oracle or anyone else.
This is where R&D will come to the play. For the vendors sake, R&D needs to come through quickly with real customer benefits, quicker, cheaper, greener outcomes have to be taken to another level. HP has had a comparatively successful launch of its new server products, Moonshot, and IBM has looked to create appliances for analytics and big data from its product set.
IBM had good results for the core market growth sectors of Smarter Commerce, Cloud and to a lesser extent Smarter Analytics. The area of concern was that the growth from the Growth Market Unit, or GMU was essentially flat. With this market dominated by Asia Pacific, this may be a surprise to some but also highlights the challenges of sustained growth in emerging markets. Currently all major markets in the region are under pressure with growth difficult due to a range of reasons from economic conditions (Australia), poor government and red tape (India), and structural challenges (China).
As a takeaway, there are two things to remember. First it was a quarter, so next quarter the picture may change. The second is that it is worth looking at how long the Systems and Technology Group has a sustainable role in the future IBM. I have noted the potential for a divestment for a couple of years now. Part of the differentiation and success of IBM over the long term has been to buy at the front of a market and sell at the peak. They have divested PC’s, hard drives, and printers, so it may shock, but there is a chance that IBM may one day directly exit the Systems business, of course starting with Servers and Storage. Selling the Mainframe may be a step too far.