Where Is Watson? The Mystery Behind IBM’s Numbers

By Douglas A. McIntyre Updated Jan 12, 12:58PM EST · Published Apr 15, 9:30AM EDT

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Where Is Watson? The Mystery Behind IBM’s Numbers — © Thinkstock

[cnxvideo id=”655405″ placement=”ros”]International Business Machine Corp. (NYSE: IBM) is about to announce earnings for the first quarter of 2017. Most eyes will be on Watson revenue. It is an umbrella brand, and it covers some large portion of IBM’s cloud and so-called artificial intelligence operations. Outsiders routinely complain that Watson is as much a marketing tool as a successful business. IBM has to strongly prove otherwise to pick up credibility lost on Wall Street over the period of CEO Ginni Rometty.

The following are a collection of comments about Watson since 2016.

From The Wall Street Journal on February 26, 2016:

International Business Machines Corp. on Thursday changed its financial reporting structure to give investors more insight into the company’s ongoing transition from a traditional supplier of business hardware, software and services into a leader in cloud computing and data analytics.

The changes shed light on some of IBM’s so-called strategic initiatives, but they did little to illuminate its biggest bet: the effort to generate revenue from its “Jeopardy”-winning Watson artificial intelligence technology.

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From The Register on January 20, 2017:

IBM Watson has taken heat from Wall Street for not adding to Big Blue’s revenue as the company reported a 19th successive quarter of decline.

The Watson brand won worldwide attention back in 2011 when the supercomputer defeated human contestants during a special series of television quiz show Jeopardy. Now the brand lives on in the corporation’s IBM Watson Group with its many Watson-themed directorates, which chief executive Gini Rometty declared would pull in $10bn in revenue by 2024.

But while Watson’s revenues are indeed increasing, IBM’s operating costs in driving that growth are going up faster. This leaves the corporation with ever-uglier margins in its cognitive solutions segment, a key part of the “strategic imperatives” on which it is pinning its hopes for the future and hiding the evidence of decline.

From Forbes, on August 25, 2016:

Dissecting IBM’s financial disclosures regarding its cloud business have been known to be a nightmare for analysts. Most of the company’s newly formed segments carry items related to the cloud, with Wall Street divided on even the most basic cloud metrics provided by Big Blue. The debate stems from disagreements over what exactly IBM classifies as cloud revenue—many argue that the company has been shifting traditional revenue streams into the cloud to boost numbers.

From Barron’s on October 18, 2016, a quote from John DiFucci, equity analyst at Jefferies:

While we believe that IBM’s new software sub segments—Solutions Software, Transaction Processing Software, Integration Software, and Operating Systems—are more representative of the functionalities and use cases of software offerings belonging to each, the lack of historical disclosures over several years nonetheless complicates analysis of both IBM’s core performance and comparison with other infrastructure software vendors. In addition, while we recognize IBM’s efforts to highlight revenue attributable to cloud- based offerings and analytics solutions, it is somewhat unclear to us which offerings within these two strategic categories are actual software offerings.

Does Watson have its fans among investors? Yes. Anything that offers IBM the chance to get into new-age cloud and AI businesses has to be considered positively. However, where is Watson, buried among all these numbers? And how is it doing?

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About the Author Douglas A. McIntyre →

Douglas A. McIntyre is the co-founder, chief executive officer and editor in chief of 24/7 Wall St. and 24/7 Tempo. He has held these jobs since 2006.

McIntyre has written thousands of articles for 24/7 Wall St. He is an expert on corporate finance, the automotive industry, media companies and international finance. He has edited articles on national demographics, sports, personal income and travel.

His work has been quoted or mentioned in The New York Times, The Wall Street Journal, Los Angeles Times, The Washington Post, NBC News, Time, The New Yorker, HuffPost USA Today, Business Insider, Yahoo, AOL, MarketWatch, The Atlantic, Bloomberg, New York Post, Chicago Tribune, Forbes, The Guardian and many other major publications. McIntyre has been a guest on CNBC, the BBC and television and radio stations across the country.

A magna cum laude graduate of Harvard College, McIntyre also was president of The Harvard Advocate. Founded in 1866, the Advocate is the oldest college publication in the United States.

TheStreet.com, Comps.com and Edgar Online are some of the public companies for which McIntyre served on the board of directors. He was a Vicinity Corporation board member when the company was sold to Microsoft in 2002. He served on the audit committees of some of these companies.

McIntyre has been the CEO of FutureSource, a provider of trading terminals and news to commodities and futures traders. He was president of Switchboard, the online phone directory company. He served as chairman and CEO of On2 Technologies, the video compression company that provided video compression software for Adobe’s Flash. Google bought On2 in 2009.