Editor’s note: Krista Macomber is an analyst with Technology Business Research.

HAMPTON, N.H. - IBM’s (NYSE: IBM) 1Q14 financial performance outlines a company in the midst of a long-term strategic evolution, and demonstrates cloud and big data-driven disruption impacting the IT industry as a whole.

Revenue of $22.5 billion was down 4% year-to-year, with software and global financing IBM’s only segments to achieve growth. Net income fell a reported 21% despite improvements to gross margin as a result of $870 million in workforce rebalancing charges. IBM will continue to funnel broad-based investments to increase scale in the mobile, security and cloud marketplaces, while exiting less strategic marketplaces. For example, IBM plans to invest $1 billion in BlueMix platform-as-a-service capabilities to increase its foothold in hybrid cloud environments, continues to build out its SoftLayer infrastructure-as-a-service capabilities, has acquired database-as-a-service provider Cloudant, and intends to divest the majority of its x86 server assets to Lenovo later in 2014.

These actions, coupled with continued struggles to stabilize the hardware top and bottom lines during 2014, will create headwinds to corporate revenue and operating margin improvements during 2014.

IBM’s Systems and Technology Group revenue fell a reported 23% year-to-year to $2.4. billion and the group’s pre-tax loss sunk to 26% during 1Q14. Meanwhile, the vendor’s annual as-a-service revenue run rate doubled year-to-year to $2.3 billion.

TBR believes this financial performance demonstrates that the longevity of IBM’s hardware business hinges upon IBM’s ability to divest its x86 server portfolio, and bridge its infrastructure-as-a-service, storage and proprietary server stories in a manner that resonates with customers as IT purchasing decisions increasingly include line-of-business executives.

Utility-based pricing models spanning from the mainframe to its XIV storage lines, and portfolio tie-ins to SoftLayer will help IBM to improve its hardware business model, but the vendor’s goal of stabilizing hardware revenue and profitability during 2014 is a tall order amid this evolution.

  • IBM has the pieces in place to re-position Power for long-term relevancy, but success remains in question as the x86 server divestiture is finalized

As industry-standard chipsets increasingly rival proprietary chipsets in terms of performance and reliability, IBM has faced the difficult task of balancing its x86 and Power businesses—a feat underscored by 1Q14 System x and Power revenue declines of 18% and 22% year-to-year, respectively. On one hand, IBM is working to close the divestiture of its x86 server business, which would free IBM to target traditionally x86-centric workloads with Power, and is on a path to spend $1 billion building out its SoftLayer infrastructure-as-a-service (IaaS) capabilities. However, as the divestiture is not yet finalized and IBM stands to benefit from support services and storage sales through the Lenovo relationship, IBM continues funneling investment into x86 server-related advertising, direct sales incentives and channel enablement.

In what TBR views as adept portfolio and ecosystem evolutions, IBM is leveraging the OpenPower consortium and Power8 architecture to reposition Power to target big data and cloud opportunities. However, this is a complex story to tell, particularly preceding the x86 divestiture. Understanding its audience and delivering overarching outcomes-focused messaging will be critical to the long-term success of the Power platform.

  • IBM is poised to tap new mainframe revenue streams, but the platform’s viability remains tied to its ability to message cost-effective business outcomes

IBM reported that System z MIPS declined 19% year-to-year during 1Q14, emphasizing that increasing the visibility of the mainframe while solidifying a message of cost efficiencies is crucial to maintaining demand from a 5 to 10 year trajectory in the face of industry commoditization. The trust and confidence of the System z customer base, coupled with IBM’s focus on creating proof points around the applicability and effectiveness of the mainframe in next-generation cloud, mobile and analytics workloads, will help to position System z closer to the forefront of customers’ business agility and decision making. This strategy will enable IBM to target new line-of-business customers despite claims from competitors that System z is expensive and outdated.

  • IBM is pivoting its storage strategy to stem continued revenue declines by harnessing the value of public cloud environments

Revenue struggles were not contained to the server segment, as IBM’s storage revenue declined 23% year-to-year during 1Q14, led by challenges in the high end. IBM was late to the public cloud storage space, and faces stiff competition around elastic storage services from pure-play competitors. Armed with offerings such as its SmartCloud Virtual Storage Center (VSC) software-defined storage platform, pay-as-you-go XIV storage pricing, and Business Continuity and Resilience and managed security services, IBM is better positioned to deliver cost-effective, right-sized storage solutions during 2014.

As a result, TBR expects tempered hardware revenue declines in 2H14 and generate new software and services opportunities for IBM.

(C) TBR