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Legacy Business Still Dragging IBM Down

Mitch Wagner
4/18/2017
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IBM's non-cloud legacy business continues to be a boat-anchor dragging the company's performance down, even as cloud and other "strategic imperatives" grow at a brisk pace, according to quarterly results announced Tuesday.

IBM Corp. (NYSE: IBM)'s overall revenue has fallen 20 quarters in a row as of the quarter ending March 31. Revenue was $18.2 billion, down 3% year-over-year. However, IBM's strategic imperatives revenue was $7.2 billion, up 12% year-over-year. And cloud revenue was $3.5 billion, up 33%, including cloud-as-a-service annual exit run rate of $8.6 billion, up 59% year-over-year. Strategic imperative revenue was $33.6 billion over the last 12 months, or 42% of IBM's revenue.

IBM's strategic imperatives business includes cloud, cognitive solutions -- which includes Watson -- analytics, mobile and security. Everything else includes, well, everything else, such as mainframes and PowerPC hardware. IBM is on track to meet its goal of seeing strategic imperatives hit $40 billion by next year, Martin Schroeter, IBM senior vice president and chief financial officer, said on Tuesday's earnings call.

Extreme Legacy
IBM data processing machine, 1957. Photo by NASA (Great Images in NASA Description) [Public domain], via Wikimedia Commons
IBM data processing machine, 1957. Photo by NASA (Great Images in NASA Description) [Public domain], via Wikimedia Commons

"In the first quarter, both the IBM Cloud and our cognitive solutions again grew strongly, which fueled robust performance in our strategic imperatives," said Ginni Rometty, IBM chairman, president and chief executive officer, in a statement. "In addition, we are developing and bringing to market emerging technologies such as blockchain and quantum, revolutionizing how enterprises will tackle complex business problems in the years ahead."

IBM recently launched quantum computing as a cloud service. (See IBM's Quantum Computing Coming to the Cloud.)

And it also launched several initiatives to help businesses take advantage of blockchain. (See IBM, FDA Look to Blockchain to Secure Health Records, Blockchain: Can It Solve the Identity Crisis?, IBM, Northern Trust Team on Blockchain Security, IBM, FDA Look to Blockchain to Secure Health Records and IBM Launches Dubai Blockchain Deal With du.)

IBM beat earnings estimates -- $2.38 per share, compared with $2.35 expected. But revenue missed expectations -- $18.2 billion compared with $18.4 billion expected.

IBM traded at $170.05 down 0.61% after hours Tuesday.

So should IBM simply dump its legacy business and focus on cloud and other strategic imperatives? Schroeter said that the company's legacy, core business is a source of strength, that IBM is "constantly reinventing."

"We really like this business. It is very high value," Schroeter says. Some of it is in declining markets, but markets that still retain high value. And other business, like WebSphere Application Server, is growing.

— Mitch Wagner Follow me on Twitter Visit my LinkedIn profile Visit my blog Friend me on Facebook Editor, Enterprise Cloud News

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