IBM earnings beat fueled by mainframe sales, but that strength may not last long

While a booming systems business is a positive for IBM, that trend isn’t sustainable and probably won’t

survive into 2019, Andrew Bartels, principal analyst at Forrester Research, told MarketWatch. Bartels

said tax breaks encouraged businesses to invest in hardware infrastructure, and large businesses that

IBM caters to, like banks and financial services companies, have been driving IBM’s mainframe gains

that were instrumental in breaking a long streak of revenue declines three quarters ago.

“The bad news is when you look across each of the segments,” Bartels said. “This is not encouraging

for a company focusing on software and services.”

While revenue from IBM’s “Strategic Imperatives” group has risen 12% to $39 billion over the last 12

months, representing 48% of revenue, Bernstein analyst Toni Sacconaghi pointed out that a lot of SI

growth comes from legacy equipment, with about 40% of mainframe revenue and about 60% of Unix

hardware revenue classified as SI revenue.

“Almost all growth was currency or hardware,” Forrester’s Bartels said. “That’s discouraging.”

And when the currency & hardware bumps are gone, then to sustain the momentum, more cost-cutting (RA's), of course!

Also, this tidbit: ". . .about 40% of mainframe revenue and about 60% of Unix hardware revenue classified as SI revenue." Knew IBM was certainly just recategorizing revenue into different buckets, but first ever seeing an estimate of the actual percentages. No wonder Strategic Initiatives are looking so good.

https://www.marketwatch.com/story/ibm-stock-ticks-higher-as-mainframe-gains-fuel-earnings-beat-2018-07-18

Comment! It's anonymous!

6 replies (most recent on top)

I worked in Systems for many years. IBM management treats the mainframe division like old garbage. If mainframe has a great quarter in spite of management, then management should get no credit. And next quarter IBM performance will be back to normal because there won't be a huge mainframe announcement.

There are many legacy software waiting in the queue to be moved under strategic imperatives. As long as they can think of an use case that is cognitive related, whether or not that capability can be productized, it will be reported as cognitive.

seeding in Saas licenses as part of ELA does not represent cloud growth. Chances are your customers will not use them and you have to find way to swap when customers don’t renew.
now when customer swap B licenses, don’t report it as growth in B.
new $ from software license audit does not equal to growth. You don’t know how many customers I talked to hate about what you are doing to them.
screenshots are not innovation. Make them work. Fix all your UI which are still showing copyright 2002. This year is 2018.
review your sellers contribution. You have too many who tag along to large deal. Does nothing other than being friend with deal maker.

Just my two cents of observations.

Even more insane is that the strategic business themselves are packed to the rafters with legacy products. IBM doesn't break out the strategic business into real details, so you have no idea how the revenue is made up. However, in prepared remarks by the CFO, he said that in Cognitive solutions for example, some growth was due to Maximo. What the hell does Maximo have to do with Cognitive? Its a old legacy software tool for asset management. This the problem with these financial analysts. They don't dig deep enough. This is all just smoke and mirrors.

Best case is analysts write about the (dismal) performance and (over) compensation and technical inability to innovate, of the elderly board of directors and technical leads. The mutual funds that own IBM deserve an independent opinion about management performance so that they demand change.

Need more examples like this: "The problem I have with IBM is that its management team, led by CEO Rometty, appears to the investment community to be totally uninterested in being upfront and honest, about IBM's poor financial performance over the past 5 years (at least)."

https://seekingalpha.com/article/4187435-ibm-mediocre-management-holding-crown-jewel?page=3

A financial analyst's job is to hype a stock in a direction that's best suited for their interests and the companies they work for. These analytical id--ts aren't in an IBM sales position knocking on doors trying to get new business. Make note of this ... most of the "Strategic Imperative" 2Q sales (and prior quarterly sales) happened with existing IBM customers. These "Strategic Imperative" sales just replaced the existing IBM software/hardware customers were using. The real key for IBM going forward is how are they going to obtain new customers. People please note, IBM has NEVER been real successful winning new business from new prospects. Long term IBM will be a smaller version of itself.

IBM 2Q revenue increase excluding currency impact is roughly $200M, of which...$300M is resulting from mainframes sales increase ! And yet you still find financial analysts pretending that growth of new strategic business is now largely offsetting decline of legacy business. What a joke ! Shouldn't they return to primary school ?

Thread regarding IBM layoffs

IBM earnings beat fueled by mainframe sales, but that strength may not last long

6 replies (most recent on top)

Post a reply