🐘 This Elephant Can’t Dance?
IBM has had a rough few years is a massive understatement. The trend of dropping revenues and profits quarter after quarter continues unabated.
Hey Global Investor, here's what you need to know before the US markets open.
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This Elephant Can’t Dance?
Simply saying “IBM has had a rough few years” is a massive understatement. The trend of dropping revenues and profits quarter after quarter continues unabated.
Background: In 2018, under then CEO Ginni Rometty, IBM had acquired Red Hat for $34B. The theory was that IBM would build an open-source hybrid cloud tech platform that assists customers as they manage their systems. What is a hybrid cloud you ask? Turns out most companies are not yet tech-savvy enough to put all their systems on the cloud. A large chunk of their systems are still on-premises, and someone will need to help them manage these two disparate technologies. That’s the hybrid cloud.
Well, Rometty, who took office in 2012, presided over 22 straight quarters of revenue losses and the Red Hat acquisition did little to change the tide. As a result, in April 2020, it was Rometty out, Arvind Krishna in. As Krishna grappled with IBM’s strategy, it became clear that cloud is where the future is. And so, IBM announced the spin-off of its legacy infrastructure services business to go all-in on cloud, even if it meant enduring some short-term pain.
What Happened? The transformation that Krishna was hoping to demonstrate is yet to show itself. IBM reported a drop in adjusted net income for the seventh straight year and a decline in sales for eight of the last nine years.
Key Numbers for the quarter:
Adjusted EPS: $2.07 vs $1.79 expected
Revenue: $20.37B vs $20.67B expected
The three major business segments - Cloud and Cognitive Software, Global Technology Services, and Global Business Services, all registered a Y-o-Y drop between 3% to 6%. However, the Systems revenue was down 18%. Krishna reiterated the legacy business spin-off as a positive and set the expectation that the company expects to grow in mid-single digits after the fact, along with $12B free cash flow.
This optimism was immediately panned by the analysts as “unrealistic” and that investors will need more details on the spin-off itself. So where does IBM go from here? Krishna is steering it straight into the hybrid cloud – where Amazon, Microsoft, and Google are already waiting.
Market Reaction: IBM stock closed at $131.65, up 1.21%. After the disappointing report, shares are down 8.35% before hours.
Company Snapshot 📈
IBM $131.65 +1.57 (+1.21%)
Analyst Rating (15 Ratings) BUY 27% HOLD 60% SELL 13%
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