https://seekingalpha.com/article/4282090-ibm-inflection-point
"Exiting low margin businesses"
Red Hat's margin last year was 12.8%. I guess IBM is preparing to divest them already?
Stop trying to discern an IBM strategy, there isn't one beyond "financial engineering, marketing hype, acquisitions to buy revenue, and cost-cutting the future away, while milking the legacy base into oblivion".
4jgn. Again remember it’s not about growth, but rather saving their way towards profitability. What has the CFO focused on in the last 3 analysts calls. Cost take outs and exiting businesses that are low profit, or that IBM chooses not to play in. Not one word (NOT ONE) about growth markets. In the Redhat call it was all about focus on the “largest 1100 customers” worldwide. They had even mapped it into their go forward Redhat strategy.. So what does that map to. System Z work loads (check), Enterprise Power ISV (cerner , epic, Oracle, and SAP) workloads (check), AIX migrations to LINUX (check), and NICHE Enterprise OS/400 workloads (JD Edwards, Jack Henry, Fiserve) check. Will they get other ISV workloads. Sure, but they don’t care because they will make it up on licensing the IP to Google and other LINUX box manufacturers. In other words go away if you are not one of the 1100 customers. Our strategy is to shrink the OEM market faster than the legacy ISV market. COST TAKE OUT, or as we used to call it, Farming the branch. The numbers work as you said for a while. We have now entered into the sales strategy of “sell what’s on the truck today, and worry about tomorrow’s strategy tomorrow”. It will be the new CEO’s problem. Ginni saw her exit ramp and took it
@4kjc good points. If they don't want growth, and just to manage cache flow as a niche business, then z definitely is that. It'll be around for decades yes, in a long slow, profitable decline. That's definitely a business model, but not the one that they're telling the street. Ginni talks about growth, but there isn't anything in the closet that can provide it. Red hat will give them a temporary bump as it's stuffed into all the early ELA renewals, which will bridge to the next mainframe cycle in 2020/2021. That will give her time to declare victory and leave, letting her successor get stuck with the massive decline in late 2021 and 2022 as both red hat fizzles and the cycle ends.
If you're right we should see a lot of divestitures between now and then, which will be hidden by the red hat stuffing bubble.
Amxp. You are starting to see the plan and Intel HW isn’t in it. IBM has been there and tried that with Softlayer. They have zero intention of competing with Amazon or Microsoft and in fact have been lapped several times already. There is a reason they have IP’ed their HW to Google so cross them off the list too. Lance Crosby is still laughing “All the way to the bank” at IBM’s incompetence. So what is IBM’s plan. YES It’s Z and Power. The CFO has already told you that. His exact words were we are getting out of the OEM services business. Read that as Intel. If you shrink the Intel services business enough, you do get profitable on the rest of IBM. Z and Power have a rather large Legacy SW install base, and IBM is aiming squarely at that. Is it a good plan. Depends on how large IBM wants to remain. If IBM shrinks itself enough they have a very viable NICHE business moving forward. If they remain their current size they will go bust. I fully expect IBM India to get sold off. Why. Because they are primarily focused on outsourcing and Intel. Both businesses don’t fit into what the CFO is telling the street (no OEM and no low margin). If IBM can accomplish that spinoff with some Lower margin USA business included, then yes they may survive. They will be approx 65% of what they were size wise, but Ginni and the executive management team will not care, as that will be the boards and someone else’s problem. Do you think Sam or Lou worries about IBM’s strategy going forward? NOPE they just call corporate and ask for their Jet to be ready to fly them. Got to love those parting gifts
@1npc They are in slow decline - neither Z nor Power will ever see the kind of growth that the real cloud players are experiencing, rather the reverse. There's no new logos for either one. P will decline faster as it (barring I) has a slightly newer code base that can better be ported to modern systems. Z users are stuck on the platform because of the massive code base that's currently prohibitively expensive to replace. No new logos - no growth.
I do think you have an interesting point though - Red Hat might be the middleware glue that let's the ancient systems talk to the modern world...essentially a modern WESB. That's actually not a bad preserve the stream strategy, and might explain the buy. Unfortunately, that market isn't remotely going to compete with the explosive growth of AWS/AZ/GCP - at best it'll flatten and postpone the continuing decline.
@1qrs Take a look at the mainframe cycles...yes, there's a cyclical bump, but the long-term trend is that those bumps are getting smaller.
In the end, IBM was trumpeting 5% cloud growth, on top of 2% market share. Amazon and Azure were getting 30-40% growth on top of 30-50% market share. If cloud's the future, IBM is already irrelevant.
Some other thoughts of Redhat
https://seekingalpha.com/article/4283830-ibm-head-clouds-feet-firmly-ground
Z might be a niche product but it's also the only thing that reliably makes money. Ginni's wonderful streak of 2 non-disastrous quarters would never have happened without Z.
1pzv. I completely agree with you that Z and Power are Niche products, but they are Niche products that continue to generate revenue via an upgrade cycle year after year after year. The legacy SW (1 trillion dollars) that runs on them is a very large nut to crack. IBM has bought Redhat to service that nut. PLEASE NOTE I didn’t say to move that workload, but rather to service it. There is an old joke about the legacy servers that run that 1 trillion dollars of SW. It goes like this. What do you call a legacy system Answer = one that works. That legacy SW has been around for 50-60 years. If someone had figured out how to replace it, they would have done it by now. IBM by buying Redhat has placed a bet that the legacy SW will never be replaced, but rather will be modernized and made cloud ready. PLEASE note even clouds have to run on a server somewhere. Z and Power are just that niche when it comes to the base backend code
The "cloud-washing" inside IBM has already begun. Just like with Watson and the Strategic Imperatives previously, everything is now being labeled as "hybrid multi cloud" even when it has absolutely nothing to do with cloud. I thought they jumped the shark a few years ago when they classified CICS as Cognitive, but we ain't seen nothing yet. They'll announce what percentage of their business is "cloud" every quarter now, until after a couple of years they'll announce "now the majority of our business is cloud so we're no longer going to track it". By then, IBM revenues will be sub-$50B, but no one will ask how you replaced a low growth business with a high growth one, yet ended up shrinking.
Things like power and z need to be first out the door. Niche technologies with no new logos aren't a path to growth. They are both in long term decline....cash rich yes, but still in decline. Problem is that red hat isn't likely to grow, and selling cloud middleware isn't exactly a growth strategy either.
How many times have they said "THIS is the decision that turns us around!" only to find otherwise?
I doubt GTS will get hit as hard as GBS. The salaries are too low to make any impact in GTS.
I’m not sure you are correct about IBM being over, BUT Ginni still is the CEO so we’ll see. IBM has to make some desperate changes if they are to survive this and come out on the other end. Gerstner dumped 30% of the company to save it. The new CEO will have to do the same. I find it quite curious that IBM dumped their experienced “enterprise” (think Z and big power) technical and sales staff and yet they are betting the farm on making a “hybrid” cloud offering out of Redhat that is going after these exact accounts. Sure seems to me you laid off the wrong folks there Ginni. People buy from people they like and respect. (especially legacy accounts). Guess that kinda slipped your mind when you were listening to the bean counters ehhh. Let’s hope that OpenStack and Openshift get the legacy accounts to move, because IBM can’t survive on 25% outsourcing margins. Yes GTS that’s you in the CFO’s bullseye. I know you don’t want to hear it, but the marketplace has moved and outsourcing (your mess for less) isn’t in scope anymore If a new CEO gets serious, look for 100-120k worth of heads to be sold, or cut. It’s the only way the numbers work
IBM is over. Ginni ruined the company ! Red hat deal is the final straw that will end in disaster !