Bob's Gutsy Leadership Blog

IBM: Finally, A Bold Move Provides Some Hope

One financial analyst calls IBM’s last ten years its wasted decade.  In that period, the company’s annual revenue dropped from a tad over $100 billion to under $80 billion and net income for the decade dropped from $14.8 billion to $9.4 billion.  In comparison, in the past ten years, Microsoft’s revenue grew from $69 billion to over $143 billion and the company has been totally reinvigorated by the move to a cloud emphasis about 6 years ago.

IBM has had two main problems.   First, its leadership under the prior CEO for the past nine years who was finally replaced 4 months ago, prioritized shareholder returns at the expense of innovation.  Her key tools to keep the stock performance from faltering were $75 billion of buybacks over the decade and $45 billion of dividends.  During the decade the R&D budget was kept flat at $6 billion. For perspective, Microsoft’s grew from $9 billion to $20 billion.

The second core problem was that IBM completely missed the shift to cloud computing as Amazon and Microsoft jumped on the opportunity and now dominate this very fast-growing segment.  The result of all this bad management is that during the decade to stock price was basically flat, and that required the buybacks and the dividends.  For comparison, the Technology Select Sector grew 377%.

While IBM has $65 billion in long and short-term debt, it does have $14 billion in cash and total assets of $154 billion.  Also, IBM is a real cash generator: for example, it generated more than $2.3 billion of free cash flow in Q2.

The reason for some hope is the acquisition of Red Hat twelve months ago.  This acquisition was championed by the individual who was recently selected to be the new CEO.  The Red Hat Linux operating system is the market share leader in the open-source operating system segment.

In IBM’s most recent quarter, its cloud and data platforms grew by 30%; no doubt Red Hat was the reason for this big improvement in the cloud business.  While this growth rate was well below that of Microsoft and Amazon, at least IBM now has a very promising area of growth.

An important element to IBM’s future success is hybrid cloud computing.  The hybrid market, which provides an interoperable IT environment across on-premise private and public cloud applications, is expected to reach $128 billion by 2025, up from just $46 billion in 2019. The Red Hat acquisition greatly strengthens IBM’s efforts in this segment.

The new CEO also has a very ripe opportunity to spin out some of IBM’s low-margin, minimal-growth businesses.  For example, its Global Business Services (GBS) segment, which has the most employees within the company.  In 2019, GBS generated $16 billion of revenue but a gross margin of only 27.7%.  In contrast, IBM’s cloud and cognitive software segment had revenue was $23 billion and a gross margin of about 76%.

What are the lessons?  First, lead trends, don’t follow.  IBM greatly failed in this area for the entire decade.  Second, don’t be so patient with key positions like the CEO.  IBM should have changed leadership many years ago.

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