Like many tech companies today, IBM (NYSE:IBM) is in the midst of a significant transition from a reliance on old-school storage, hardware, and PC-related sales to the future of the industry: the cloud, Big Data, mobile, the Internet of Things (IoT), and data analytics. The good news is that IBM is showing some signs of life within these critical areas.
The less-than-stellar news for IBM shareholders is that based on its stock performance -- it's down about 15% year to date -- investor patience appears to be wearing thin. The question is: What do CEO Ginni Rometty and team need to do to appease an anxious market and get IBM back to its once-familiar industry leadership position? The answer can be found by monitoring the growth, or lack thereof, of one vital number that will determine if IBM is continuing to make headway in its transformation objectives.
The IBM mantra
Catchphrases seem to be the norm in instances like IBM, in which longtime industry stalwarts are shifting their business focus. Microsoft (NASDAQ:MSFT) has its "mobile-first, cloud-first" maxim that sums up CEO Satya Nadella's transition away from PC-related sales to new, burgeoning technologies.
In IBM's case, Rometty and its global workforce operate with an eye toward its "strategic imperatives," which consist of fast-growing markets, including the aforementioned cloud, Big Data, security, analytics, and IoT, as well as mobile, social, and cognitive computing. It's these strategic areas that will determine IBM's future, and they can be summed up best by one key figure that underscores the progress of Rometty's strategic imperatives: revenue as a percentage of total sales.
Last quarter, Rometty said the combined revenue of IBM's strategic imperatives divisions made up 27% of its $19.3 billion in the third quarter. Not bad, but short of IBM's objective of driving 40% of its total revenue from its new-ish strategic imperatives group in the next three years.
Clearly, IBM won't move the percentage of total revenue needle by leaps and bounds each quarter, but monitoring this critical objective when Q4 earnings are announced on Jan. 19 will go a long way toward determining if it's heading in the right direction. Inching closer to the 40% of total sales goal will also help validate IBM's slew of cloud, Big Data, and Watson-related analytics acquisitions and investments this year.
IBM has literally invested billions of dollars to expand its strategic imperative offerings, and if last quarter is any indication, there are signs that the time, money, and manpower directed to these new areas are showing signs of life.
Slow but steady
In some respects, Microsoft's early success in meeting its mobile-first, cloud-first objectives has probably hurt IBM in the eyes of some investors. With an annual run rate over $8.2 billion last quarter, Microsoft has quickly become a leader in the cloud. Its search advertising revenue improvement of 29% and strong growth of Microsoft's flagship Office 365 are in large part the result of getting its Windows 10 OS into as many devices as possible, regardless of manufacturer, and sales of Surface Pro pseudo-tablets as part of Nadella's mobile strategy.
That said, IBM is making inroads in its strategic imperatives, though on a smaller scale than Microsoft. Last quarter's more than 65% increase in cloud sales -- after factoring in currency headwinds -- put IBM on pace to generate $4.5 billion in annual revenue from this key unit. Analytic sales also improved, by nearly 20%, along with a 12% increase in security sales and significant jumps in both social and mobile revenue.
Combined, IBM's strategic imperatives grew over 30% last quarter compared with the year-ago period. But the question IBM needs to answer come its Jan. 19 earnings call is whether it's any closer to its goal of 40% of sales derived from its most important units, and by how much, because that's the number that really matters.
Tim Brugger has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.