IBM’s Cloud Business Is Growing But Lagging Behind Rivals

The latest quarterly results from IBM have revealed that the cloud business of the tech giant is growing but not as fast as its rivals such as Google Cloud, Microsoft Azure and Amazon Web Services. IBM’s cloud business is also not growing fast enough to offset the declines that are being registered in the tech company’s legacy business.

Revenue declines

In the latest quarterly results IBM reported revenue declines for the 21st quarter in a row. Sales from the cloud unit and the technology services unit of IBM fell by 5.1% to a figure of $8.4 billion. Analysts had been expecting revenues to come in at $8.6 billion. Cloud sales, however, rose by 17% to reach a figure of $3.9 billion when adjusted for currency. In contrast analysts expect growth for Amazon Web Services to come in at 41%.

“It was decent, it was not a complete disappointment. One of the big things for us is the relative performance,” Morningstar’s Andrew Yange, said.

Earnings per share

For the full fiscal year, IBM expects earnings per share to come in at $13.80. This is in line with the guidance the company had issued in the first quarter. This was higher than had been anticipated as Wall Street had been expecting the technology firm to issue an earnings per share guidance of $13.68. And having increased its quarterly dividend earlier in the year, compared to its dividend in 2010, IBM’s payout to shareholders will now have more than doubled in the course of that period.

One challenge that the cloud presents for IBM is that the shift to software as a service will lower the revenues that previously used to be obtained from selling software licenses. This is not restricted to IBM, however, and applies to other legacy software firms as well.

Software license renewal

According to a survey conducted by Wedbush Securities, among software firms IBM suffers from the greatest exposure with regards to the renewal of software licenses. In 2016 among 104 buyers of enterprise software in corporations based in the United States, about 41.3% of the respondents revealed that Big Blue possessed the highest contract renewal numbers.

Though the cloud and IBM’s other strategic investments are growing, the turnaround is going to take longer than had earlier been anticipated. According to Yange, between 18 and 24 months will be required before the technology giant is able to resume revenue growth. And even then the growth will be in single digits.

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