(Quoting entire article for those who can't access complete link).
Summary
Despite a slew of recent pro-IBM articles the company is doomed.
Earnings are being cast in a manner that looks like a turnaround but actually isn't.
The company plans further drastic downsizing from which it is unlikely to recover.
This essay is in direct response to Daniel Katz's IBM Is Not Down for the Count. The gist of his argument is that IBM's cloud revenue has been growing steadily and this week's announcement of IBM (NYSE: IBM) winning a seven0year contract with Workday (NYSE:WDAY) (a presumed savvy customer) shows Big Blue has its cloud act together. Katz has a follow-up pro-IBM post, IBM's Survival Instinct, which might have led me to title this post IBM's Death Wish, but I think you can see where I am headed with this.
My points here are simple. As I explained in some detail in my post IBM: 1Q'16 Financials Are Misleading, IBM has lately been telling an earnings story apparently intended to misguide Wall Street. The plot of this story is simple: Cognitive Computing (especially Cloud) is up-up-up while Mainframes and associated businesses are fading fast so it is important for IBM to transform itself into a Cognitive Computing company. But the truth is that Cognitive Computing (more on that in a later paragraph) isn't growing much if at all and is actually losing lots of money. But this is obscured in the earnings reports by revenue taken mainly from Systems (Mainframes) and reported as Cognitive when there is nothing - NOTHING - Cognitive about that business. This is IBM's transition story and it is blatantly wrong, but because it takes a little effort to figure that out from the earnings reports, most readers don't understand that.
This segmentation story continued in 2Q so my writing about it had little to no effect on IBM. The company is still robbing Systems to pay Cognitive.
And speaking of Cognitive, that's a relatively new term for IBM to use. You'll recall last year the strategic imperatives were specifically referred to as CAMSS (Cloud, Analytics, Mobile, Security and Social). Why rename it Cognitive when the previous name contained so much useful information? Well Social is a bust for IBM, so Cognitive doesn't include it, for one thing. They could have gone from CAMSS to CAMS but someone might have asked what happened to the second S? Going from CAMSS to Cognitive was both easier and more obscure. It's hard to argue that transaction processing (stolen from Systems and based primarily on 40 year old mainframe code) belongs inside CAMSS, but with Cognitive, who really knows?
This week's Workday deal (the company does cloud-based HR and financial applications) is what's supposed to convince us that IBM's Cloud business is finally in gear. It's a seven-year deal for IBM's cloud to be used by Workday for internal development - that's what the release says. Now some questions: 1) How big is the deal in dollars?, 2) How much of Workday's cloud business is actually being diverted from Amazon Web Services? Nobody knows. IBM never mentions dollars and most investors don't know how much Cloud it takes for internal development work or - for that matter - whether Workday is prohibited from using non-IBM cloud services for that work. I didn't see the word "exclusive" in the announcement.
Workday is a great private tech company so their R&D spending is probably around 10 percent of sales, but most of that is spent on people, not Clouds. Cloud service specifically for development are unlikely to be more than 10-20 percent of R&D which is to say no more than 1-2 percent of gross sales which are probably under $1 billion. So while this is a symbolic victory for IBM it is unlikely to represent more than $20 million in revenue.
That IBM got this chance to do some work for Workday (they have to view it as a chance to increase their share of the company's Cloud spend at Amazon's expense) comes down entirely to IBM's recent purchase of Meteorix, a very successful seller of Workday consulting services. Meteorix deeply understands Workday, Meteorix is now part of IBM, so Workday giving the company a shot isn't surprising. But I'll tell you that right now, today, is the best that relationship between IBM and Workday will ever be.
First, Meteorix is now part of IBM's Global Business Services division, formerly PriceWaterhouseCoopers - the people presently doing such a good bad job on the Australian census. Second, having purchased Meteorix, IBM is unlikely to put any more money into the company, s---ing it dry just like its other acquisitions. So the investment, if any, required to make Workday a happy customer is unlikely to happen.
IBM doesn't put money into improving its acquisitions because of the company's earnings fixation. They can buy lots of little companies, sure, but those are investments, not expenses, and so they don't affect earnings. But once the deal is done any further cash infusions are expenses and hurt earnings. So IBM doesn't in recent years tend to put money into its acquisitions, which is why in the long run they tend to do so poorly. "Never feed a cash cow," an IBM executive once told me. "Just milk it until it is dead."
Now two bits of anecdotal information. I talk to IBM employees and former employees all the time as anyone trying to understand the internals of a company should do. With IBM shedding so many workers and so many retiring it's not surprising that a few end up at competitors. One who landed at Amazon Web Services (NASDAQ:AMZN) told me recently that, having worked in Cloud services for both companies, he was amazed how far ahead Amazon was and doubted that IBM will ever catch up. Another source was told his division has been told to downsize its headcount in coming months by 50 percent. That is not a survival plan for IBM. Heck it is not even a survivable plan.
With headcount reduction numbers like 50 percent and almost no severance costs we can expect many more deep cuts at IBM over the next few years. They are losing business and are cutting ahead of the decline. They are going to maintain earnings and the illusion for as long as they can.
Most IBM Analytics profits actually come from other products. Most of IBM's new Cloud business has been from services deals. When it comes to generating truly new revenue all of the CAMSS businesses are doing almost nothing. The net of the new business and the decline of the old is consistently a loss of 10%-11% a year.
It is only a matter of time until this truth is finally and broadly accepted. It is too late for IBM. Even if IBM could admit the plan was flawed and a new approach was required, there isn't enough time. The company has been too badly damaged, they have squandered too may good people, too much money, and too much of its reputation.
IBM is down for the count and that count is probably right now between seven and eight. That is not to say there isn't money to be made in the short term or by shorting the stock, but after CEO Ginni Rometty retires with her lump sum next year, all bets are off.