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International Business Machines Corp. in the Cradle of Strength

By Adam Brownlee – Mar 26, 2016 at 9:00PM

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As the weather improves, it's time to check the yard and remove the dead rubbish. For IBM, though, it appears that the stagnant vines from last year may contain some shoots of green.

International Business Machines Corp. (IBM 0.17%) has been struggling as of late with a host of legacy products and services that are dying on the vine: mainframes and overall systems hardware, to be specific. This decay was evident in last year's full results, as revenues declined by 12% to $81.7 billion and net income dipped by 15% to $13.4 billion. The bright spot in the story, though, includes Big Blue's pivot to faster-growing business segments such as cloud computing, business analytics, mobile, and one other good guy that has surfaced recently indicating the legacy vine may still have some life left in it. 

Palpitations of life
A report this month from International Data Corporation, an information technology market research, analysis, and advisory firm, shows that IBM in fact outperformed overall server market growth by more than 3% in the fourth quarter of 2015. Specifically, the company saw double-digit growth in its z System products -- a segment that leverages its legacy mainframe expertise and applies it to the higher growth platforms of cloud, mobile, and analytics. As indicated in a recent company press release commenting on this growth, "The next-generation z13 mainframe, optimized for digital businesses and hybrid cloud environments, is designed to handle mobile transactions securely and at scale, while enabling clients to run analytics on the system and in real time."

Image source: IBM.

The company also saw strong growth its Linux on Power Systems product, and management indicated that this success resulted in part because the technology is based on an open architecture, which  allows for collaboration and rapid innovation.

To put this spurt of legacy mainframe server growth in context, for 2015, systems hardware revenue growth for IBM was in a dismal, downward spiral from quarter to quarter until the fourth quarter hit. Overall, systems hardware growth for the technological giant was negative 1.4% in the fourth quarter of 2015.

2015 Systems Hardware YOY Revenue Growth

First quarter


Second quarter


Third quarter


Fourth quarter


For the full year, systems hardware revenue dropped by 24.2%, from just under $10 billion to $7.6 billion. This last-minute palpitation of growth may be a sign that systems hardware still has some life to bring to the Big Blue plate, and if its pulse continues to beat, it will be coupled with some very promising, new strategies.

Cloud, analytics, and mobile -- oh, my!
The path forward for IBM includes the technological platforms of cloud, business analytics, and mobile, which were up in revenue by 43%, 7%, and over 200%, respectively, in 2015.Overall, the revenues for IBM's new strategic imperatives, which also includes security, grew by 17% to $28.9 billion in 2015 and now represent approximately 35% of total IBM revenue. The pace of growth in these channels has been relatively fast as well, as in 2013 they represented 22% revenues.

What lies within these business channels? Cloud computing is the migration away from data and IT infrastructure hosting on local, internal servers, moving instead to third-party servers at remote locations, a service that companies such as IBM offer. Although Big Blue faces stiff competition from (AMZN -1.08%) and Microsoft Corporation (MSFT -0.18%) in cloud computing, IBM says it was the largest cloud provider in 2015, with revenues of $10.2 billion.  Amazon and Microsoft by comparison reported cloud revenues of $7.8 billion and $6.34 billion respectively in 2015. 

Within analytics we find Watson, the cognitive-intelligence being that stomped all over the competition on Jeopardy! in 2011. IBM is currently integrating Watson into healthcare solutions to give it the cognitive capability to apply machine learning at scale and help physicians diagnose and treat patients. The business segment that Watson resides in, business analytics, reached revenues of approximately $17.9 billion in 2015, an increase of 7%, and a total that represents 22% of 2015 revenues.

Within IBM mobile we find MobileFirst, a comprehensive portfolio of mobile software and services that enables clients to manage, integrate, and leverage mobile devices. MobileFirst is an enterprise solution, designed to faciliate the rapid development, administration and monitoring of secure applications for business clients.   In 2014, IBM partnered with Apple  and has since delivered over 100 MobileFirst iOS applications.For 2015, revenues in mobile tripled, according to the company's annual report.

Each of these channels has the bright-eyed attention of management, which is keeping an eye toward the future.

The road ahead
Throughout this past year, IBM stock has been in the doldrums, at one point reaching a six-year low of $116.90, in part because of the perception of its dying vine of legacy products. The stock has since recovered a bit to a price of approximately $147, and if systems hardware can continue to maintain its pulse and if the burgeoning, new strategic imperatives including cloud, analytics, and mobile continue to blossom, then IBM might very well find itself in the cradle of great strength that leads to a bright, Big Blue future.  

Adam Brownlee owns shares of International Business Machines. The Motley Fool owns shares of and recommends and Apple. The Motley Fool owns shares of Microsoft. 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.

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