IBM Lurches Toward December Lows

By Douglas A. McIntyre Updated Jan 12, 12:53PM EST · Published Apr 19, 9:45AM EDT

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[cnxvideo id=”510430″ placement=”ros”]Stung by poor earnings and analyst downgrades and price cuts, International Business Machines Corp. (NYSE: IBM) shares dropped to $162, almost 5%, Wednesday morning. This puts them near a recent low point hit in December. Between now and IBM’s next earnings release, there appears little to prop up the stock. While its legacy businesses continue to erode, its new cloud and artificial intelligence operations have caught on with customers only modestly

IBM’s new age flagship brand is Watson, in the mix at its artificial intelligence unit. How Watson is doing exactly is hard to tell. IBM does not break out Watson revenue. As such, there is no way to calculate margins for the business.

IBM has failed almost every test a turnaround can fail. Revenue across most of its units dropped. The top line fell for the 20th quarter in a row. The businesses core to its future posted mediocre results. CEO Ginni Rometty has been in her job too long. IBM’s board must know that.

Rometty’s comments are about the same every quarter and do not touch on revenue, which spirals down, or softening margins:

In the first quarter, both the IBM Cloud and our cognitive solutions again grew strongly, which fueled robust performance in our strategic imperatives. 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.

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Revenue for the first quarter fell from $18.7 billion last year to $18.2 billion. Gross margins dropped across all five of IBM’s major divisions, and for the entire company fell from 46.5% to 42.8%. The cost to shrink IBM has gotten expensive.

Most important, the revenue from four of five IBM’s major units fell. In the fifth, Cognitive Solutions, it rose from $4.00 billion to $4.06 billion. IBM’s core expansion was hardly an expansion at all. “Strategic imperatives revenue of $7.8 billion in the quarter, up 12 percent.” Somewhere buried inside these numbers is Watson. IBM probably continues to refuse to give exact numbers for the initiative because they are not impressive.

IBM does present a strange set of calculations to demonstrate its attempts to right the company have taken hold:

Cloud revenue of $14.6 billion over the last 12 months
Cloud as-a-Service annual exit run rate of $8.6 billion in the quarter, up 59 percent year to year

“Annual exit run rate” is not a GAAP term and does not mean much. The rate could drop at any time, altering the annual figure. It is an artificial construct that means very little.

In among all the smoke and mirrors about IBM’s progress is a core truth. Watson is not a colossal success. IBM continues to struggle. Rometty needs to be replaced with someone who can do the job.

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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.