Some Thoughts About IBM Earnings Report

IBM reported fourth quarter earnings last week and analysts have reasons to be optimistic about the results. Despite reporting its 19th consecutive quarter of sales decline, big blie produced better than expected quarterly revenues. More importantly, the numbers showed strong indication that IBM’s famous transformation initiative is finally working.

In terms of the numbers, IBM reported a company forecast adjusted earnings of $13.80 per share beating analyst estimates of $13.74. The highlight of the earnings report was the performance of the so called “strategic imperatives

“ which includes areas such as cloud, mobile, analytics and security. The group of technology segments which is the core of IBM’s transformation now accounts fro 41% of IBM’s total sales.

Even though IBM’s revenue fell 1.3% to $21.77 billion, it was still ahead of analyst’s expectation of $21.64 billion. The market has recently rewarded IBM’s stock which have raised 36.2% in the last 12 months (making long term shareholders like Warren Buffett look like geniuses again ;) )

The Never Ending Transformation

IBM’s “strategic imperatives” have been at the center of the movement of shift big blue from a traditional enterprise software company to a player in merging technology markets. The transformation has seen IBM jump in late in some markets such as cloud computing while learning the charge in others such as cognitive computing. The most impressive part of IBM’s transformation is that it has taken place without avoiding the scrutiny of public markets.

Last year I remember a prominent Silicon Valley venture capitalist (going to save the name) telling CNBC that betting on IBM was betting against the future of America. The comment came a few days after another disappointing earning report by big blue that raised some doubts about the viability of the ongoing transformation. Today, IBM’s clear leadership in foundational technology markets such as artificial intelligence(AI) or internet of things(IOT) certainly presents a more appealing picture to investors.

One important aspect to understand and value IBM’s transformation is that it should be seen as a continuous process without an explicit end date. A strong indicator that IBM’s transformation has reached a mature stage will be when the software giant switches back to growth mode. However, analysts should not consider that sign a final point in the transformation. As IBM embarks in new strategic initiatives in green-feild markets such as blockchain technologies, its transformation imperatives are likely to evolve and change. From Wall street’s perspective, IBM should aim to achieve stability and predictability and not a final stage on its strategic initiatives.

Putting IBM’s Transformation in Perspective

To put IBM’s transformation movement in perspective, let’s rapidly draw a quick comparison about big blue’s position in strategic tech markets with a group of the incumbents that led the enterprise software space in the last decade: Microsoft, Oracle, SAP and HPE.

In the cloud computing space, IBM is training Microsoft azure but its performance remain ahead of Oracle, SAP and JHPE. IBM is also far ahead of other enterprise software incumbents in the AI and cognitive computing markets. In the IOT space, IBM Watson IOT Platform and Microsoft Azure IOT have achieved comparable market tractions which are superior than the results achieved by SAP, Oracle and HPE. IBM’s cyber-security offerings have also out-innovated the rest of the traditional enterprise software incumbents.

That simple analysis clearly shows the impact of IBM’s transformation in the emerging technology areas. At least for now, the number are showing a positive result.

CEO of IntoTheBlock, Chief Scientist at Invector Labs, I write The Sequence Newsletter, Guest lecturer at Columbia University, Angel Investor, Author, Speaker.

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