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IBM had its strongest quarter in years. It’s not enough.

Protocol Enterprise

Good morning, and welcome to Protocol | Enterprise. In this Thursday's newsletter: IBM's slowly turning battleship, how tech workers really want to work, and why China is now a bigger cybersecurity threat than Russia.

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The Big Story

Growing pains

"Cloud" has always been a fairly nebulous term in enterprise computing, meaning both a physical location and a new way of thinking about software development. IBM appears to have settled on a definition of "cloud" that translates to "software that helps you use an actual cloud provider."

IBM posted its best year-over-year revenue growth number in a long time on Monday, which would ordinarily be an impressive accomplishment in the second year of CEO Arvind Krishna's tenure — except for the fact that the number was 3%. Still, revenue coming from what IBM called "cloud" services was up 9% during its second quarter to $7 billion.

IBM is in a race that's very familiar to enterprise tech companies of a certain age: It's scrambling to sell new products to old customers who are no longer interested in its traditional businesses. It's hoping that those customers want tools that can help them manage applications running in their own data centers and on public cloud providers.

  • In IBM's Cloud and Cognitive Services division, overall revenue of $6.1 billion rose just 2% despite a 25% increase in "cloud revenue" (IBM doesn't exactly define this) in that group to $2.1 billion. It appears that much of that growth was driven by Red Hat, which saw revenue rise 17%.
  • The single largest amount attributed to "cloud" revenue — $2.4 billion — was recorded in the Global Technology Services division, which IBM is in the process of spinning out into a new company called Kyndryl.
  • Meanwhile, IBM's actual cloud revenue (from IBM Cloud) declined by 19% to just $700 million, which is a rounding error compared to the revenue numbers that AWS and Microsoft will report next week when they release earnings.

IBM's strongest quarter in years pales in comparison to the performance of most cloud companies, especially when you factor in the historic surge in cloud demand created by the pandemic.

  • Even assuming IBM's cloudy revenue is truly cloudy, 9% revenue growth is better than only five companies on Bessemer Venture Partners' Emerging Cloud Index.
  • That performance even trails Box, which is under intense pressure from its investors to find new sources of revenue growth.
  • The albatross around IBM's neck remains its Systems division, which saw revenue decline 10% during the quarter to just $1.7 billion.

Red Hat and Krishna have done what they can to get IBM pointed in the right direction. But it's still hard to understand how one of the most iconic companies in U.S. history will ever regain a leadership position in enterprise tech, no matter how many strange television commercials it runs during sporting events.

  • IBM is trying to capitalize on hybrid cloud interest by starting at the data center and moving out into the cloud, positioning itself as a neutral party that will work with all the major cloud vendors.
  • In reality, the company's mission is to keep as many existing accounts in-house as possible with tools that will help them modernize their older IBM or Red Hat infrastructure while maximizing the life of those investments.
  • IBM is banking on newer products called Cloud Paks to help drive growth, and while CFO Jim Kavanaugh told investors during the conference call the company was pleased with the growth of that product group, it's still only growing at about 4%.
  • The problem with this strategy is that the next big companies will almost certainly be born on top of cloud services, and the cloud providers are getting very good about supporting customers in their data centers should they want to keep some apps in-house.

Old enterprise tech companies are astonishingly hard to kill; they often linger on for years, if not decades, on the backs of their existing customers and their long-understood reluctance to completely throw out systems that might be outdated but still work. But IBM is going to need to show a lot more than 3% growth to thrive.

  • The company still has an astonishing 345,000 employees, almost twice as many as Microsoft, which is producing twice as much revenue as IBM.
  • It will shed 90,000 jobs with the Kyndryl spin-off, but it's difficult to see how it can support a workforce of even that reduced size without significantly more growth amid declining net income.
  • And at a certain point, it becomes harder and harder to recruit new workers to help old companies solve their problems.

— Tom Krazit


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Micron innovations, like the world's most advanced 1α DRAM and 176-layer 3D NAND tech, deliver the data foundation that enables businesses to turn data into insight and gain a competitive edge.

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