Editor’s note: IBM’s (NYSE: IBM) latest earnings report on Monday beat Street expectations but its stock lost ground in after-hours trading as guidance wasn’t increased. But Technology Business Research analyst Jennifer Hamel says Big Blue’s transition away from traditional IT services to high-end cognitive solutions is paying off.
HAMPTON, N.H. – IBM’s transition to higher-value strategic imperatives, i.e., cloud, analytics, mobility, social and security (CAMSS) progressed in 1Q16, as the company continues to shed its traditional IT services baggage in favor of industry-focused, consulting-driven cognitive solutions.
Traditional ERP implementations and IT outsourcing remained albatrosses preventing revenue growth in Global Business Services (GBS) and Global Technology Services (GTS). However, total services revenue performance continued to improve in 1Q16, declining only 2.3% year-to-year, the smallest year-to-year decline 2013, signaling growth in strategic imperatives is coming closer to replacing losses in traditional services areas.
Steep margin declines in both services segments in 1Q16 highlighted the price – in the form of acquisitions, workforce restructuring and office closures – IBM is paying for delaying this transition as the as-a-service economy began to gain traction a few years ago. Ultimately these actions will enable IBM to focus throughout the rest of 2016 on becoming clients’ strategic transformation partner for cognitive solutions and cloud platforms, driving continued services revenue improvement in the coming quarters.
Reported Global Services revenue performance reflects the impact of currency fluctuation (particularly the stronger U.S. dollar). GTS revenue (comprised of the Infrastructure Services and Technical Support Services subsegments of the new Technology Services and Cloud Platforms reporting segment) declined 1.2% year-to-year in 1Q16 to $7.4 billion.
Adjusting for currency, Infrastructure Services grew 4%, driven by growing demand for services integration as part of the transition to hybrid cloud environments, while Technical Support Services declined 1%.
GBS revenue declined 4.3% year-to-year to $4.1 billion in 1Q16 (adjusting for currency, GBS declined 2%). Within GBS, strategic imperatives revenue grew 19% to $2 billion, representing nearly half of total GBS revenue. IBM continues to invest in industry- and product-focused consulting capabilities to help drive clients’ adoption of CAMSS technologies (including those of competitors such as Salesforce and Microsoft), while shifting away from traditional back office implementation and outsourcing services.
To execute on its strategic imperatives in Europe IBM ramps up investments in local talent and horizontal capabilities
In line with IBM’s portfolio strategy of shifting to delivering higher-value, higher-margin services encompassing its strategic imperatives, the company is building its talent with in-demand skillsets (e.g. analytics, cloud, IoT, digital marketing) and reshuffling its onshore vs. low-cost headcount ratio in Europe. Recent articles have surfaced that IBM will continue rebalancing its workforce in European countries such as Germany, the U.K., Sweden and Denmark and we believe the company is likely moving the delivery of legacy GBS and GTS offerings, such as ERP implementation and strategic outsourcing, to low-cost locations particularly as European clients have become more willing to outsource work outside of Europe.
Since December IBM has accelerated the pace of investing in its onshore C&SI employees in Europe. IBM acquired ecx.io (Germany) and Optevia (U.K.) as well as announced plans to purchase Aperto (Germany) and Bluewolf (U.S.-based with locations in London, Paris, Prague, Sydney and Melbourne). The company established its global headquarters for Watson IoT in Germany, likely to gain traction within manufacturing and announced its first Watson Health CoE in Europe (Italy). TBR research around cloud and analytics adoption indicates clients in Europe prefer to work with C&SI vendors based in their local markets, suggesting IBM’s strategy will succeed.
IBM expands its analytics services addressable market by launching the Cloud Data and Analytics Marketplace
In February IBM introduced the Cloud Data and Analytics Marketplace for Developers which allows developers to construct, implement and manage applications in a hybrid cloud environment. Developers are able to select cloud data services and access 150 datasets via the IBM Analytics Exchange essentially offering clients self-service analytics and cloud services. We believe this marketplace broadens IBM’s addressable market as the company will be able to attract clients staffed with their own data scientists and developers that may need help customizing their own applications leveraging cloud and analytics technologies or scaling up analytics programs as their organizations grow.
TBR’s 1Q16 Business Intelligence Software Customer Researchrecently found that buyers will increasingly look for analytics offerings that deliver business outcomes and we believe this marketplace will help IBM attract new types of clients and present opportunities to upsell C&SI and managed services as clients look to extract the greatest value from their analytics investments.