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By Alan Krans, Technology Business Research
Editor’s note: Allan Krans is a senior analyst with IBM’s latest quarterly earnings report, announced Thursday, topped Wall Street expectations and upped its profit forecast for the year. Krans says IBM’s bets on end-to-end solutions and emerging technology are paying off.
HAMPTON, N.H. – While Microsoft criticizes (NYSE: IBM) for being too focused and Oracle hypes a forthcoming showdown in the hardware space, IBM continues to push ahead with its strategy of driving bottom-line profitability by providing end-to-end solutions and capitalizing on emerging technology trends.
Software was the key profit driver for IBM during its expansion over the past six years, and continues to drive profit growth even during the recession.
In good times and bad, IBM Software continues to pad the financials of its parent company. IBM Software’s ability to drive revenue growth and profit was already well-established, but the division is also demonstrating strong resiliency in the face of difficult economic times. Although IBM Software revenue declined again in 3Q09, the rate of revenue decline was the lowest amongst IBM’s divisions, preventing larger corporate wide revenue declines during the quarter.
Perhaps more importantly than revenue stability, the software division remained a critical source of profitability for IBM, facilitating the expansion of profit even as revenue declined. IBM Software pre-tax income increased by 21.2%, even though revenue declined by 2.6% during 3Q09. IBM Software accounted for 42% of total IBM pre-tax income during the quarter, and is a key factor in IBM’s decision to increase its 2009 net income per share goal.
Slow and steady
IBM Software achieved growth over the past six years at a steady and sustainable pace, which may be the reason its proven resilient to the recent economic downturn. Even as its software business nearly doubled in size, IBM Software’s revenue growth never exceeded 20% over the past six years, as the company steadily made acquisitions, integrated the new assets, and continued to improve its existing portfolio and go to market capabilities. Although IBM was outpaced in growth by more aggressive competitors such as Microsoft and VMware during positive economic conditions, IBM Software is maintaining much more consistent performance during the recession, while Microsoft experiences double-digit revenue declines, and VMware reports an abrupt halt to its high double-digit growth rates.
Imitation is the sincerest form of flattery
Even as Oracle CEO Larry Ellison directly challenges IBM, he is also upfront about attempting to emulate some of IBM’s strategy with the acquisition of Sun. With a robust portfolio of hardware, software, and services, IBM brings a wealth of assets to bear on customers in the market. The value of that strength is particularly evident during the recession, as the diversity of IBM’s model provided flexibility to minimize revenue declines and continue to generate profit growth. Even though hardware generates lower profitability margins compared with software, it remains a valuable tool for IBM to broaden revenue, increase sales opportunities, and cross-sell across the entire portfolio.
IBM makes cloud lemonade
One of the distinguishing characteristics of IBM’s strategy over the past decade has been its penchant for capitalizing on emerging technology trends, even ones that pose a threat to existing business models. Distributed computing, Open Source software, and now cloud computing are all trends that IBM is capitalizing on in order to extract any new financial value, while minimizing the downside risk to existing businesses.
IBM is taking that same approach with cloud computing, continuing to build out infrastructure, bring offerings to market, and support its partners in delivering cloud solutions to customers. Just like Open Source and the shift from mainframe to distributed computing, adoption of cloud computing poses a threat to IBM Software’s existing business model.
However, customer adoption will occur with or without IBM’s participation, so the company is aggressively promoting its cloud portfolio to capitalize on new revenue opportunities, and maintain the value proposition of traditional software products.