IBM Systems sales sag as revenue growth slows to a crawl – but at least tape did OK

IBM has blamed another quarter of tepid performance on its servers. Big Blue's last quarter before it spins out services limb Kyndryl saw it land revenue of $17.6 billion – just 0.3 per cent above revenue for the same quarter in 2020. For the year to date, which now covers three quarters, the corporation has posted anaemic 1.6 …

[BOFH in Training]

Drive by in action

Storage was a rare bright spot, with 11 per cent growth driven by driven what IBM described as “demand from hyperscalers for our tape products and growth in entry-level all-flash storage following our product refresh earlier this year".

"Driven by driven".

Tried to submit corrections and got :

Mail the Author

Sorry, we experienced an internal error trying to handle your request.

[W.S.Gosset]

Re: Drive by in action

You witnessed a driven-by shooting

[Korev]

Storage was a rare bright spot, with 11 per cent growth

So how long until IBM sells it off?

[trevorde]

Beatings will continue until morale improves

How to incentivise your sales staff, the IBM way:

https://www.theregister.com/2021/08/31/ibm_sales_lawsuit/

[Anonymous Coward]

I Believe in Miracles

"The Ramones", a US punk band from from 197-1996 write a song about IBM -

"I Believe In Miracles"

I used to be on an endless run.

Believe in miracles 'cause I'm one.

I have been blessed with the power to survive.

After all these years I'm still alive.

The four original members of the band died in 2001, 2002, 2004, and 2014.

[juliansh]

A coming re-org will lump Cloud and Cognitive together

That's the idea, keep pretending to move broken bits around to obscure the reality of poor performance and make historical comparisons more challenging.

Piss poor management.

[Anonymous Coward]

Asleep during business 101.

In my dealing with IBM, the management obsession was revenue. Sales people had to book sales no matter what. Nearly always over-promising and under-bidding, pissing off the poor suckers who were expected to deliver on grossly underfunded projects and customers who got an inferior solution delivered late.

The message to shareholders is obsessing about "growth", but do the investors really care if they lose money on more turnover.

A focus on making realistic profits from a smaller turnover would make more sense.

"Turnover is vanity, profits are sanity"

[Anonymous Coward]

Re: Asleep during business 101.

Yes, certainly. However, the stock market values revenue growth, not profits, free cash flow, or dividends paid. In principle that shouldn't matter; everyone with sense should be happy to buy quality companies at low prices because others are idiots. But that collides with modern executive compensation, which holds that everyone in charge of the company should be paid primarily in either stock or stock options, meaning that they have an overwhelming personal interest not in how successful the business is but in how high the stock price can be sent. Hence the absurd focus on revenue growth not only at IBM but almost everywhere else.

IBM is in fact an excellent cautionary example of where this leads, because the company now has neither growing revenue nor growing profits and is continuing to shrink on nearly every axis, including the valued-above-all-else share price. The businesses have been pretty thoroughly rotten for a long time and management incompetent; inevitably, Mr Graham's weighing mechanism has caught up to IBM and no amount of pandering to the voting mechanism can overcome it.

Lessons to have learned:

* Compensate your executives with cash flow sharing, not shares or options; then focus on the business, not the stock market

* Large corporations should be managed for terminal growth in line with the overall economy; higher expectations are unrealistic

* Inexperienced, ineffective, and offshore employees are cheaper than others, but the difference in value is orders of magnitude greater

* Cheating and abusing people destroy incentives to hustle and innovate, so if you do the former you will have less of the latter

* Successful acquisitions are immediately accretive

* Profitable but low- or negative-growth lines of business should not be sold off but managed for decline and their cash reinvested in growing lines or paid out to shareholders

* No one is fooled by restructurings done to make comparison harder, nor by prolonged financial engineering

It is probably too late for IBM to learn these lessons, though I would hope that some of their more observant junior executives have learned them and will carry them to other companies. Certainly nothing we have seen from their directors and senior managers would suggest an understanding of these lessons.

[Jimmy2Cows]

Eternal growth

Forgetting for a moment how bad IBM has become, I've never understood this expectation of, this demand for, eternal growth. A company that's covering its costs and making profit is perfectly viable, but if it doesn't grow year on year, forever, no matter how mature that company is, the stock price suffers.

At some point the market becomes saturated and growth naturally drops off. As long as running costs are covered and there's enough profit for regular dividends, what's the damn problem?

Vultures wanting ever more from their investment. They end up plunging their own share values just because a perfectly sustainable business hasn't delivered the continual growth Wall Street (and others) demand.

[SecretSonOfHG]

Re: Eternal growth

While your comment is spot on, you're ignoring that IBM lost is dominant status a long time ago. Technology and business changed faster than they could adapt, and the IBM way of keeping profits up has been so far an on going exercise of cost cutting actions that exchange short term benefits for long term survival.

On business of the IBM scale you can do that many, many times to keep these profits up, until there is nothing to downsize/offshore/layoff any longer. And IBM is approaching that point now.

[druck]

Re: Eternal growth

Reporting any growth, no matter how small, is a miracle for IBM, we are more accustomed to reading about 20 plus consecutive quarters of decline.

[rcxb1]

Re: Eternal growth

<blockquote>As long as running costs are covered and there's enough profit for regular dividends, what's the damn problem?</blockquote>

Why should anyone invest money into a company that is under-performing relative to the market indexes (e.g. S&P 500)?

Some can carve out special niches, such as losing less value than the index in a downturn, or being less volatile in general, but the general rule is prospects of comparably more growth than others, with lesser downside.

[Anonymous Coward]

Re: Eternal growth

"Why should anyone invest money into a company that is under-performing relative to the market indexes (e.g. S&P 500)?"

That would depend on your definition of under-performance. To me, a large-cap cap-weighted index that consists of mostly Apple and Alphabet (I exaggerate, but only slightly) yielding 1.3% with a long-term historical inflation-adjusted dividend growth rate of 1.6% is underperforming almost anything, including IBM, and on even a 20-year time horizon poses significant risks to capital that can be justified neither by short-term returns nor long-term growth expectations. Remember that the S&P 500 contains only large businesses that are difficult or impossible grow rapidly.

The OP has a strong point here. It's easy to get caught up in a rapid growth story and demand that from every business, but that's simply not realistic. Beyond a certain size the best you can hope for is growth roughly in line with the overall economy. IBM was certainly at that size for much of the last century and arguably still is; that it's still a large, profitable company 50 years beyond its heyday and has been steadily paying its shareholders the entire time is nothing short of amazing. But what buyer of IBM in the late 1960s was expecting 15% annual growth?! As an investor, you need to look for either small companies that seem likely to grow their businesses very rapidly for an extended period of time, or large companies that are well-managed and will consistently produce and distribute profits. At the right price, both are attractive, but it's easy to overvalue growth especially when current yields are low. As an example, suppose IBM never increase their dividend (in nominal terms) while the S&P 500 continues its historical trend. How long would it take for the S&P 500 to deliver as much inflation-adjusted income as IBM for your investment dollar at today's market prices for inflation expectations and these assets?

The answer is 49 years.

Successfully managing any business for 49 years is very challenging. Maintaining above-market growth for that long is almost tautologically impossible. I don't personally think IBM will continue paying its current dividend for 49 years, because I expect their managers to do something stupid much sooner that will result in losses large enough to alarm the company's creditors and trigger convulsions that will include a substantial dividend cut (for a similar cautionary example in what should have been a slow-growing but reliably profitable company, see AT&T). The thing is, though, a company that I can buy yielding 5.11% doesn't have to do much to outperform the S&P 500 over the remainder of my lifetime. All it has to do is stand still -- not even in real terms, but nominally -- and act like a bond. To summarise it in stark mathematical terms, a decaying asset that pays out 3% less each successive year and a growing asset that pays out 1.6% more each successive year will pay out the same amount over the next 49 years if the decaying asset starts out paying 3.9x as much.

That's why growth is not so terribly important to large, profitable corporations. It's much more important to manage the businesses effectively, keep the balance sheet healthy, and pay the shareholders from the profits. And for an investor, it's as much about how much you pay for these assets as it is about how the underlying businesses perform. It is very, very unlikely that most of the people buying the S&P 500 today will live long enough to get their money back as dividends; the amount of time is closely related to a financial concept called duration, which measures a kind of risk: longer-duration assets suffer greater capital losses when yields rise by a given margin. Blitzer and Dash (at S&P, in fact) published an interesting paper on equity duration in 2005 that seems to be kind of forgotten today, and is a worthwhile read. If you're investing for a university endowment or for your unborn grandchildren, the S&P 500 is probably a fine asset. Those of us investing for ourselves have to look elsewhere. It's a pity IBM is so poorly managed, because with decent management the stock would be a good buy at today's prices even if one assumed no growth going forward.

And that's why someone might buy IBM instead of the S&P 500.

[julian.smith]

Re: Eternal growth

Hi Fred,

I don't want you as my financial advisor.

The S&P 500 has a 10 year annualised total return of 16.16%.

Your money DOUBLES in (72 / 16.16)= 4.5 years

The stock market is not a bond (the return is not guaranteed)

The total reurn of the stock market is:

- capital gain (the vast majority)

- dividends (a tiny fraction)

FYI IBM's 10 year annualised total return is -0.07%

[all data from Morningstar]

FYI the S&P 500 weighting of Apple (6.86%) + Alphabet (1.75%) = 8.61%

I repeat, I don't want you as my financial advisor, you don't understand what you are talking about.

[Anonymous Coward]

Re: Eternal growth

All real return comes from dividends. Every corporation eventually goes bankrupt (or is wound down, but that's become extremely rare for listed companies), at which time its shares are cancelled and have a value of zero. The total value of the share at a point in time is still, as it has always been, the discounted present value of all future distributions to which the shareholder will be entitled. If the financial advisor you choose disagrees with that, I suggest you check his licenses because that is a basic founding principle of finance that is taught in every school around the world and has been for centuries.

If person A sells the share to person B and person B to person C and so on, an offsetting pair of profit and loss is booked in connection with each transaction. Because the value of the share is not yet known, it is not yet known which trader books the profit and which the loss, but that they offset exactly is certain. A trader books a profit who sells a share for more than its value; the buyer has obviously overpaid and will book a loss. The opposite happens when a share changes hands for less than its value.

When you sum all of those profits and losses, you arrive at a net loss equal the total sum raised by the company in initial offerings, shelf offerings, treasury sales, and rights issues. In other words, the company is worth nothing at the end, so all the money actually invested in it must either have been lost or paid out as dividends. The value of the trades themselves sum to a loss of all the money invested in the company itelf. True, some traders will have profited from their trades, but overall no money was made in trading.

Any net profits, then, must have come out of the company's business itself, and been paid out to shareholders in the form of dividends. And that is exactly what happens.

People who believe in "capital gains" are either ignorant or arrogant. The ignorant see rising share prices and assume that this is their due as smart traders when in fact it is mostly the effect of inflation and a 40-year period of falling interest rates. The arrogant know better, but believe they are smarter than other traders and will always buy low and sell high, booking permanent profits while saddling other traders with the offsetting losses. Perhaps some of them are right, but as trading stocks is not my business I would not expect to be among them.

You are free to spend your money in whatever way makes you feel good about yourself, and I am not a financial advisor. But there are many people in the world who know better than you, and my answer to the original question stands: that's why someone would consider buying an asset that you would not.

[Edwin Tumblebunny]

IBM Management Culture Has Always Been Penny Wise and Pound Foolish

During the late 90s and mid 2000s I worked as a contractor for IBM. I was managed from one location, and worked with people from another location at a customer site. My local colleagues (both IBMers and contractors) had a laptop each and a customer supplied desktop. I had a customer supplied desktop. There were two tasks I did periodically which required certain software to be installed on the desktop. Unfortunately, both pieces of software could not be installed at the same time because the desktop's hard disk did too small. So, I went to my IBM manager and asked for a disk upgrade to be able to do both tasks without going through the install/uninstall process. I was spending eight hours a week installing and uninstalling. Naturally, no hard disk upgrade! So, for the next year IBM paid for eight hours of my time to swap the software. The hard disk upgrade would have paid for itself in a week.

After a year I was able to convince the customer to give 'me test' PCs for various project work, so that I was able to do my job since IBM still would not supply me with an actual IBM (Lenovo hadn't bought IBM's PC division yet!) laptop. Eventually, I needed a memory upgrade for work tasks and after a few weeks a new IBM manager approved it! That would have been great, but it took three months to get approval from the higher management and by the time I received the memory stick, I had been supplied by the customer with a different machine for a different project and the memory was no longer compatible!

Finally, after nearly eight years I was told by my tenth IBM manager that I was finally getting an IBM laptop!! Unknown to the manager I had access to the shipping and inventory system and noticed one day that the new laptop was mysteriously heading to Ohio instead of Seattle! After a few days, it headed towards Seattle, but had magically become a much older laptop! Five days before it was due to arrive IBM lost the contract with the customer and another company took the contract over. I was given the news that I would not get the laptop due to IBM being terminated from the contract. So, with nothing to lose, I confronted my manager as to whether his wife liked her new laptop (his wife worked for IBM and they lived in Ohio) and what kind of con was he trying to pull? Did he think I would not notice the difference in laptops? He hung up and I never heard from him again.

Working for IBM as a contractor was the worst work experience I ever had - they did not supply the equipment to do the job, and in the later years they started to reduce contractor rates - usually just before buying another company! I would have quit, but I had to stay in the job until my Green Card was approved.

So, I will never work for IBM again in any capacity as these anecdotes are just the tip of the iceberg as to how IBM managed to pull defeat from the jaws of victory.

[sanmigueelbeer]

Tank is not yet empty

Red Hat has also made a $3.5 billion contribution to the firm's Global Business Services

IBM's purchase of Red Hat was indeed a coup. This will keep the bucket "topped up" until the profits dries up and then IBM, like any other companies, will buy other product(s). Rinse and repeat.

[BillyZ]

The synergy with Red Hat looks to be paying off. I see z/OS development can be done off the mainframe via Redshift, which means coding on laptops with modern tooling. That is something to brag about. The LinuxOne initiative looks interesting as well. IBM needs to keep pushing this kind of news. The Cloud of course has everybody's attention but I predict that passion will cool for multiple reasons. IBM needs to stay visible for when currents shift and on-prem becomes viable again.