IBM Move To Hive Off Cloud Business Fails To Pay Off

Last year, IBM hived off its cloud business, under CEO Arvind Krishna's leadership, to focus on the $1 trillion opportunities in hybrid-cloud space. However, the tech giant reported a 4.5% decline in revenue in the last quarter of 2020.

Krishna acknowledged the dip in revenue in an official statement: "We made progress in 2020 growing our hybrid cloud platform as the foundation for our clients' digital transformations while dealing with the broader uncertainty of the macro-environment." Nevertheless, Krishna is hopeful that IBM's decision to focus on hybrid cloud and AI will lead to revenue growth in 2021. 

Subpar Performance

IBM's cloud and cognitive software revenues were down 4.5% to $6.8 billion by the end of last quarter. It reported $20.4 billion over the last quarter of 2020 with a loss of 6 points and adjusted earnings per share of $1.41. The company reported $73.6 billion in revenue for the entire fiscal. It also reported a revenue fall of 6% on an annualised basis. IBM's free cash flow for the full year was $10.8 billion. 

Despite setting high hopes and going big with the cloud computing and AI initiatives under the new CEO, the company reported revenue declines similar to his predecessor, Ginni Rometty. With IBM's ambitious move to split the company, backed by the $34 billion Red Hat acquisition, it is looking forward to expanding the customer base and becoming a leader in the hybrid cloud world. 

That said, analysts expect the revenue and earnings to rise 1% and 38%, respectively, as the effect of pandemic blows over. Interestingly, the tech giant has not released any guidance for the first quarter of 2021. 

In what may come as a slight respite for the company, IBM-acquired Red Hat grew by 19%. Red Hat's acquisition has given the company a technology base to build a hybrid cloud technology platform based on open-source. Nevertheless, the bottom line is not improving. 

Krishna has been building on IBM's cloud vision by buying companies such as Instana (performance monitoring company), Nordcloud (hybrid cloud consulting firm), Taos (a cloud consulting and managed services provider), Big Blue bought 7Summits (Salesforce integrator), and more. The acquisitions might start to show results later in 2021 as the company doubles down on the cloud business.

James Kavanaugh, IBM senior vice president and the chief financial officer, said, "In 2020 we increased investment in our business across R&D and CAPEX, and since October, announced the acquisition of seven companies focused on hybrid cloud and AI." With solid cash generation, steadily expanding gross profit margins, disciplined financial management and ample liquidity, IBM will be well-positioned for success as the leading hybrid cloud platform company, he said.

Challenges Ahead 

IBM is currently facing many challenges due to a sales decline in IT services, business software, and hardware businesses in the wake of the pandemic. Krishna expects the company would see around $12 billion in free cash flow by the end of 2021.

Though the projections look dicey, IBM has a long term plan in place to scale its cloud business. With the right strategy and leadership, IBM may indeed live up to its projections.