IBM’s executives recently opted to forgo their bonuses, after the company’s seventh straight quarter of sales decline. The same executives face a struggle to turn the hardware behemoth away from the traditional hardware space, towards more profitable territory.
IBM has invented some of the most influential technology of the past six decades, including magnetic stripe cards, Automated Teller Machines (ATMs), floppy disks, hard disk drives and Dynamic Random Access Memory (DRAM). Now the company reinvents itself, as the technology sector’s shift to cloud limits the demand for hardware such as servers and mainframes.
IBM’s decrease in revenue can be attributed directly to hardware sales, which fell 26 percent year-on-year in the fourth quarter of 2013 to $4.3 billion. Total revenue for the company stood at $27.7 billion, meaning hardware accounted for 15.5 percent of all revenues. Profit margins in hardware dropped by 3.5 percent, highlighting the decaying state of that segment.
IBM decided not to accept bonuses for this year, due to the company’s performance in 2013. In 2012, CEO Ginni Rometty earned a cash bonus of nearly $4 million, according to SEC filings. “In view of the company’s overall full-year results, my senior team and I have recommended that we forgo our personal annual incentive payments for 2013,” Rometty said in a company press release.
Rometty has already begun addressing the company’s exposure to struggling sectors by bolstering its cloud offerings. Last year IBM bought Infrastructure-as-a-Service (IaaS) provider Softlayer for $2 billion in order to compete with the likes of Amazon and Google in the public cloud business, and also announced plans to spend $1.2 billion to boost its own cloud segment. Revenue from the cloud increased 69 percent year-over-year to $4.4 billion in 2013.
IBM took further steps to distance itself from the hardware market, selling its low-end server business to Chinese PC-maker Lenovo for $2.3 billion, $2 billion of which was in cash. The x86 server business which IBM sold off reportedly produced one of the lowest profit margins in the company. The deal also allowed IBM to reduce staff, as all 7,000 employees working on the x86 servers will move to Lenovo. As of the third quarter of last year, IBM’s server business was the second largest in the world, according to a report by technology research company Gartner. Hewlett-Packard, another struggling giant, is the biggest player in the $12.3 billion market.
IBM is also reportedly considering selling or spinning off its chip business. A report in the Financial Times states that the company has appointed Goldman Sachs to gauge interest in the chip division, which experiments with materials such as photonics, graphene and carbon nanotubes.
Software revenues provided a bright spot in IBM’s fourth quarter results for 2013. The software side of the business reported a 2.8 percent increase in revenues. But this provides little comfort to a company which missed its overall revenue targets in every quarter of 2013.
IBM is not alone in going through a huge transition. Microsoft is switching strategies too, although moving in the opposite direction to IBM. Traditionally a software company, the firm now heads into hardware through acquisitions such as that of Nokia. Like IBM, Microsoft is also transforming its software offerings to the cloud. Meanwhile, PC makers like Dell and Acer diversify their core offerings as they struggle to break away from the flattening PC market.
IBM’s latest moves indicate it is heading in the right direction. But further progress will take time, and senior executives have already admitted their failure last year. If the transition does not succeed, the company known for giving the world so many brilliant inventions will have to go back to the drawing board.
IBM over five years
The contrasting fortunes of two of IBM’s major divisions, software and systems and technology sales (which is hardware), shows the company’s changing focus. Software accounted for 29.2 percent of total revenue in 2013, compared to 22.3% in 2009. Hardware made up 16.9 percent of revenue in 2009, and only contributed 15 percent in 2013.