IBM Transformation Struggles: Cloud & AI Revenue Declines

During CNBC’s Transform conference a few months ago, IBM’s Chief Executive Officer, Arvind Krishna, described the company as undergoing significant change. He expressed his intention to leverage the $34 billion acquisition of Red Hat from 2018 to assist clients in navigating an increasingly complex hybrid cloud environment, and to utilize artificial intelligence for improved operational efficiency.

This strategy appeared promising; however, IBM’s recent financial reports indicate a 4.5% decrease in cloud and cognitive software revenue, totaling $6.8 billion. Simultaneously, revenue from cognitive applications – encompassing AI-related income – remained unchanged.

While Krishna might find some encouragement in Red Hat’s strong performance, with revenue increasing by 18% compared to the previous year, the company’s overall revenue has declined for four consecutive quarters. This places Krishna in a similar situation to his predecessor, Ginni Rometty, who oversaw 22 straight quarters of revenue decline at IBM.

Krishna detailed his plan to CNBC in November, stating, “The Red Hat acquisition provided us with the technological foundation to develop a hybrid cloud platform built on open-source principles, and to offer our clients choices as they progress on this path.” To date, this approach has not yet generated the anticipated growth for Krishna.

The company is also currently in the process of separating its traditional managed infrastructure services division. As Krishna explained in the same November discussion, this separation is intended to allow IBM to concentrate its efforts on its new strategic direction. “The success of the acquisition now provides the impetus for our next, and more substantial, step: divesting the managed infrastructure services. This will enable the remainder of the company to be entirely focused on hybrid cloud and artificial intelligence,” he stated.

Although it is premature to declare Krishna’s transformation strategy a failure, the results have not yet materialized, and IBM’s decreasing revenue is likely as disheartening to Krishna as it was to Rometty. A shift towards more contemporary technologies and away from older systems should eventually yield positive outcomes, but this has not yet been observed under either leader.

Krishna continued to refine this vision towards the end of the previous year by acquiring companies such as Instana, a cloud applications performance monitoring firm, and Nordcloud, a hybrid cloud consulting company. These acquisitions were made to expand IBM’s portfolio of hybrid cloud services, positioning the company as a comprehensive provider in this area.

Echoing the sentiments of former NFL coach Bill Parcells regarding underperforming teams, “you are what your record says you are.” Currently, IBM’s performance continues to worsen. While Red Hat is demonstrating progress, it is insufficient to counteract the losses, and adjustments are necessary.