Will IBM return to revenue growth?

Krista Macomber, senior analyst at TBR, says enterprise IT vendor IBM will return to revenue growth in coming years.

She says increasing CAMSS contribution to IBM’s revenue in Q2 2016 helped mitigate the IT vendor’s overall revenue decline.

IBM’s commitment to restructuring its business to more closely align with evolving customer demands remains strong. The vendor restructured its financial reporting in 1Q16 to better reflect its new structure, and began consistently reporting its CAMSS (Cloud, Analytics, Mobile, Social and Security) revenues —the key drivers of the company’s transformation. CAMSS now generates 38 percent of IBM’s total revenue, putting the vendor ahead of schedule for its stated goal of 40 percent CAMSS revenue contribution by 2018.

In Q2 2016, IBM maintained its aggressive R&D investments as the vendor rapidly modernized its portfolio through organic development and acquisitions to achieve revenue growth. However, IBM’s legacy businesses’ revenues faced more challenges in Q2 2016 and, as a result, IBM’s corporate revenue declined 2.8 percent year-to-year to $20.2 billion. As IBM invests for long-term growth through CAMSS, its profitability was also challenged in Q2 2016, with operating margin falling 330 basis points year-to-year to 16.1 percent.

Meanwhile, overall CAMSS revenue increased 12 percent year-to-year to $8.3 billion, maintaining its strong revenue growth rate and helping to offset legacy revenue declines. IBM’s ongoing focus on monetizing its CAMSS initiatives will enable the vendor to quell revenue declines in its overall business by the end of 2016.

As IBM’s investments increasingly yield sustainable revenue streams, IBM will continue shifting its focus away from its legacy businesses and toward its CAMSS initiatives. Its cloud portfolio led revenue growth among its CAMSS initiatives in Q2 2016, as customers are increasingly adopting “as a Service” capabilities.

Watson is another driving force behind IBM’s CAMSS-related successes, as Watson is a key differentiator for IBM in multiple strategic markets and verticals, including IoT and healthcare. Yet TBR believes IBM will continue making strategic investments in other core aspects of its business, including its hardware, as IBM recently demonstrated with new investments in its Power9 chips. IBM will leverage its hardware capabilities, along with its CAMSS solutions, to encourage IBM hardware adoption for high-demand markets, such as cloud-based security and analytics, where IBM’s full stack of solutions can be leveraged to provide customers with holistic solutions.

IBM’s multiyear investment strategy will result in the expansion of Power9 chips into low-end and mid-range servers

IBM’s Power business continues to face ongoing pressure from increasingly powerful and reliable x86-based systems, but also new opportunities as the rise of modern workloads such as hybrid cloud service hosting and real-time analytics processing increase the need for customized innovation. Through opening the Power platform to third-party innovators via the August 2013 launch of the OpenPower Foundation, IBM has created an inroad to viability for Power-based systems in next-generation data centers, citing notable wins from cloud service providers Google and Rackspace. However, volatile Power server revenue performance, rising applicability of custom-designed ARM-based systems in data- and performance-intensive workloads and cloud providers’ data centers, and initiatives from Intel to increase the flexibility of its platform result in headwinds. Despite these challenges however, IBM continues investing to position Power as a strong competitor for Intel and Arm in the chip market.

In 1H16, IBM invested in expanding the reach of its Power9 chip. Intel’s chips remain dominant in the industry-standard server market, but TBR believes IBM’s Power9 chips are being increasingly adopted, which is challenging both Intel and ARM’s ability to grow market share. While Power9 chips are already leveraged in large enterprise customers’ data centers, IBM is investing to increase their adoption among smaller-scale customers, with a goal of beginning to ship Power9-based low-end and mid-range servers in 2H17.

As a result, IBM’s Power business to remain challenged in the short-term as investments to bring new products to market will take time to have an impact on revenue. However, IBM’s Power9 push will prove successful at building a more consistent revenue stream. IBM will differentiate against Intel, ARM, and competing server vendors by focusing on messaging clear, cohesive value and vision in the CAMSS markets that is supported by Power. IBM will position its Power9 chip-based solutions as next-generation, supporting adoption of solutions including cloud and analytics, by leveraging Power as the foundation and layering its strong portfolio of software and services on top to target specific customer demands.

IBM debuted a new version of Watson with Cisco to create more opportunities for IoT market expansion

The expansion of IBM’s partnership with Cisco will serve to increase IBM’s CAMSS revenue by further monetizing Watson. The partnership combines IBM’s Watson analytics capabilities with Cisco’s networking capabilities to make it easier for customers to develop and run IoT applications. For many IoT applications, it is faster and more practical to perform analytics at the “edge” of the network, as close to the device or sensor as possible, rather than storing and transporting data to the cloud to be analyzed. By partnering to offer Watson-based analytics at the edge of Cisco-based networks, both vendors will gain a foothold in customers’ increasing IoT deployments, positioning the vendors to address other IoT requirements such as security as their IoT projects mature.

The hybrid analytics approach to IoT that leverages IBM’s and Cisco’s assets enables customers to test-drive IoT in small projects with edge analytics, and gradually expand the projects to larger, centralized analytics installments when appropriate. This will create opportunities for IBM and Cisco to gain new customers and increase their respective share of existing customers’ wallets. While IBM and Cisco’s partnership is a turning point for the two vendors, many of IBM and Cisco’s competitors, including Dell, Microsoft and SAP also offer both edge and centralized IoT solutions. However, IBM and Cisco’s reputations for customization as well as their strong reputations in the analytics and networking markets will differentiate the two from competitors in this space.