For six consecutive quarters, IBM has seen a decline in revenue and a significant slowdown in net profit growth. The company, once hailed as a money-making machine on Wall Street, is now facing a crisis of confidence from investors. More alarmingly, IBM currently lacks effective strategies to counter this predicament. Is it possible for the giant to regain its agility? Apparently, it's not as easy as before.
Poor Performance
Last week, IBM released disappointing results for Q3 2013, showing continued revenue declines and a marked slowdown in net profit growth. In fact, this marks the sixth consecutive quarter of declining revenues for IBM. With no immediate signs of improvement, investors began selling off their shares, causing IBM's stock price to hit its lowest point in nearly two years.
The continuous decline in IBM's revenue can be attributed to two primary reasons based on financial reports: first, the rapid decline in its hardware business, which outweighs the revenue generated by other growing segments; second, the collective weakness in emerging markets, particularly the BRIC countries (Brazil, Russia, India, and China), which have historically been growth drivers for IBM. Notably, IBM's hardware revenue in China plummeted by an astonishing 40% in Q3 this year.
What has led to IBM's current predicament? Besides macroeconomic factors, IBM once again cited "ineffective execution" as a reason. After the release of Q1 results this year, IBM's new CEO Virginia Rometty publicly criticized the company's sales team for poor execution.
The same issue resurfaced, clearly causing some anxiety for Rometty. She quickly made adjustments to the leadership team within the hardware division and urged employees to take action. Last week, in an internal email to employees, she wrote: "Our culture is one where performance determines income, and all of us have a responsibility to act and address our underperformance."
Business Quagmire
In the eyes of many analysts, strengthening execution at IBM may slow down the rate of revenue decline but cannot fundamentally reverse the challenges the company is facing. Some analysts believe that IBM's business model has "structural" issues.
IBM primarily profits by selling expensive hardware servers, software licenses, and costly services to enterprise clients, especially large enterprises. However, this business model is being significantly impacted by emerging IT technologies such as cloud computing. In the era of cloud computing, enterprise clients can rent server storage space and processing power at a cost far lower than hiring consultants or purchasing hardware from IBM.
The loss of the CIA contract serves as a good example. At the beginning of this year, Amazon outbid IBM to secure a $600 million cloud computing contract with the U.S. Central Intelligence Agency. Although IBM subsequently protested, the deal ultimately went to Amazon. In fact, during the bidding process, IBM's proposal was much cheaper than Amazon's, but IBM failed to fully meet other core technical requirements.
"IBM's customer base is shifting, and they are no longer following IBM's technological path," said Zhao Guodong, TMT analyst at Hongyuan Securities, to Sina Tech. Enterprises are turning to more affordable cloud computing technologies, even adopting free open-source software, while IBM's business model remains centered on expensive software and hardware products and services.
In today's IT landscape, cloud computing, big data, and web-based software services are growing rapidly. However, as a key IT manufacturer, IBM is no longer a leading player. Despite being credited with inventing cloud computing, IBM was ranked last among the top 15 best-quality cloud service providers in a report by Gartner on August 19th.
Can the Giant Regain Its Agility?
Despite its current difficulties, no one in the IT industry dares to overlook IBM. The company still makes forward-looking predictions for the entire IT sector and boasts strong research and development capabilities. However, according to Zhao Guodong, IBM will find it difficult to return to a central position. He stated, "We've seen IBM make many efforts through acquisitions, but it's hard for this giant ship to turn around."
Since 2007, IBM has spent $6 billion on acquisitions in the cloud computing sector and has also made strides in big data analytics. However, due to its commitment to achieve a per-share earnings target of $20 by 2015, IBM has been cautious in its R&D investments and mergers in these new businesses, resulting in no standout acquisitions.
To meet its initial profitability commitments to Wall Street, after Rometty took office, there were substantial stock buybacks, cost controls, and even mass layoffs and unpaid leave for employees. While profit growth met the initial promises, analysts are increasingly concerned that this kind of profit growth may have reached its limit.
Clearly, people are more interested in IBM's next steps. But at least for now, IBM does not show any signs of having a significant advantage in any emerging technology field.
In its century-long history, IBM has experienced multiple transitions in its main business. In the 1990s, when IBM suffered billions of dollars in losses and underwent massive layoffs, it decisively shifted its focus from mainframe business to servers, software, and technical services, reviving its prosperity under the leadership of Lou Gerstner.
Because of its conservatism, IBM missed many opportunities, but also because of this conservatism, IBM has developed steadily to this day, becoming one of the few tech companies with a hundred-year history. Now, IBM is once again at a time when change is necessary. The giant needs to dance again, but the challenge is obviously greater this time.