IBM Has a Cloud Problem

by Tom Taulli | April 18, 2012 11:46 am

IBM Has a Cloud Problem

ibm IBM Has a Cloud Problem [1]At a 100 years old, IBM (NYSE:IBM[2]) knows how to deal with disruptive changes in technology. But there’s one mega-trend the company has failed to address: the cloud.

Pioneered by Salesforce.com’s (NYSE:CRM[3]) Marc Benioff, this technology centralizes software on data centers. That makes it easier to update systems in real time. The software is sold on a subscription basis, which tends to be cheaper.

True, at this point the impact of the cloud appears to be minimal for IBM. Yesterday, Big Blue reported a decent quarter, with profits up 7.1%, to $3.07 billion, or $2.61 a share, and revenues were up 0.3%, to $24.67 billion.

But if you drill down on the numbers, there are troubling signs.

For example, IBM posted a 6.7% decline in its hardware business.  There are likely many reasons for this, such as the competitive environment, new technologies and the uneven macroeconomic environment. But the cloud is also likely an issue. That’s because companies that use this software don’t need to buy as much hardware, including servers and storage systems.

At the same time, IBM’s software solutions are mostly non-cloud. Keep in mind that the company has engaged in many acquisitions over the years to bolster its footprint — but the targets have been legacy operators. While this has meant higher margins, these applications could come under pressure over the next couple years.

Finally, IBM’s consulting business may also come under pressure. Consider that a big part of these revenues come from installing traditional software applications, such as for enterprise resource planning (ERP) solutions. But as companies move toward the cloud, there will be less demand for highly paid consultants. In the latest quarter, IBM’s services revenues were off about 1%.

The good news is that IBM has a large cash hoard and knows how to pull off deals. As seen in recent cloud IPOs, there are many interesting targets, including Splunk, Proofpoint,
ExactTarget (NYSE:ET[4]), Brightcove (NASDAQ:BCOV[5]) and Demandware (NYSE:DWRE[6]).

Still, IBM needs to get going soon. After all, rivals such as Oracle (NASDAQ:ORCL[7]) and SAP (NYSE:SAP[8]) are already getting aggressive with their dealmaking in this space.

Tom Taulli runs the InvestorPlace blog IPO Playbook[9], a site dedicated to the hottest news and rumors about initial public offerings. He also is the author of “The Complete M&A Handbook”[10], “All About Short Selling”[11] and “All About Commodities.”[12] Follow him on Twitter at @ttaulli[13] or reach him via email[14]. As of this writing, he did not own a position in any of the aforementioned securities.

Endnotes:
  1. [Image]: http://investorplace.com/wp-content/uploads/2012/04/ibm.png
  2. IBM: http://studio-5.financialcontent.com/investplace/quote?Symbol=IBM
  3. CRM: http://studio-5.financialcontent.com/investplace/quote?Symbol=CRM
  4. ET: http://studio-5.financialcontent.com/investplace/quote?Symbol=ET
  5. BCOV: http://studio-5.financialcontent.com/investplace/quote?Symbol=BCOV
  6. DWRE: http://studio-5.financialcontent.com/investplace/quote?Symbol=DWRE
  7. ORCL: http://studio-5.financialcontent.com/investplace/quote?Symbol=ORCL
  8. SAP: http://studio-5.financialcontent.com/investplace/quote?Symbol=SAP
  9. IPO Playbook: http://investorplace.com/ipo-playbook/
  10. “The Complete M&A Handbook”: http://goo.gl/aLNDk
  11. “All About Short Selling”: http://www.amazon.com/All-About-Short-Selling/dp/0071759344/ref=sr_1_1?s=books&ie=UTF8&qid=1302184310&sr=1-1
  12. “All About Commodities.”: http://www.amazon.com/All-About-Commodities/dp/0071769986/ref=ntt_at_ep_dpi_10
  13. @ttaulli: https://twitter.com/ttaulli
  14. email: mailto:tom@taulli.com

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