IBM ditches chipmaking business, looks to cloud as Q3 numbers get slammed

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Analysis If Google is struggling with its numbers, then there isn’t much hope for everyone else. The third quarter financial results have been a bit of a struggle across the board, but the big legacy tech vendors are really starting to feel the heat.

Oracle’s revenues only went up 3% year on year, lower than Wall Street expected, while SAP’s marginally went up but its software division took a hit. Now it’s IBM’s turn – and the findings don’t look good.

IBM posted its third quarter financial results, showing revenue of $22.4 billion, down 4% or 2% at constant currency, operating net income at $3.7bn, down 18%, yet cloud revenue was up more than 50% year to date.

Owch. Yes, the company has been making waves in its cloud computing investments, ever since it bought SoftLayer. CloudTech has generally been impressed with what IBM has done in cloud this year. A billion dollar investment, and a strategic rebranding to becoming a cloud company is certainly an impressive statement of intent. But it didn’t cut much ice among the analysts.

Toni Sacconaghi, of Sanford Bernstein, used the word “crisis” in his question to the IBM execs on the earnings call, which included CEO Ginni Rometty, who normally doesn’t appear on these calls.

Explaining the numbers were part of the reason she was on the call, Rometty replied: “Obviously we were disappointed in this quarter, but when we talk about what we’re doing for the long term and these actions, these actions go on the heels of what has been a series of what I think are very bold actions from the entire year with a very clear strategy,” she said, according to Seeking Alpha.

“The strategy’s correct, and now it’s our speed of execution that needs to continue to improve.”

This strategy includes lopping off limbs which are no longer profitable, such as its server division to Lenovo for north of $2bn earlier this year and earlier this month, its chipmaking business to Globalfoundries – but in that one, IBM is paying $1.5bn for the privilege.

Yet Rometty will hope this is a small price to pay so she can run the 102 year old International Business Machines her way.

There’s plenty of evidence and promise about that – take into account IBM’s recent partnership with Apple to give Cupertino the enterprise foot-up it needs, putting IBM software into iDevices. Similarly, the recent partnership with SAP HANA Enterprise Cloud is an interesting one.

The argument IBM, and SAP, and Oracle, are all using is the same one. Yes, the numbers don’t look great now, but look a bit further along the path and it’ll get better. We’ve got to move away from on-prem software revenues, and cloud sales can’t make up that shortfall straight away.

It’s an easy get out clause struggling companies make to keep the vultures away for the near future at least. But in this instance, it’s true. It will mean short term pain. IBM’s layoffs this year (known as ‘resource actions’) were especially brutal, with the Alliance@IBM employee page continuing to make depressing reading. But it’s happening to other companies too – take Microsoft as an example of that. And if it results in long term gain through cloud subscription revenues, then Rometty et al will consider it a job well done. But remember – it’s still an ‘if’.