Watson AI panned, 5¼ years of sales decline ... Does IBM now stand for Inferior Biz Model?

Ginni's still grinning, of course

Watson Power7 cluster. Pic: IBM

Analysis If there's one thing you can give IBM credit for, it's Big Blue's ability to put on a brave face. Not only has its Watson offering been skewered by Wall Street analysts, it's also just reported its 21st straight quarter of revenue decline.

Its CEO Ginni Rometty, whose annual pay package is a whopping $33m (£25m), hasn't overseen a single quarter of sales growth since she took over the US tech giant in 2012. Her profit margins are also down across the board. But we're told IBM has "strengthened" its grip on the market. We'll let you decide.

On Tuesday, Big Blue announced its financial figures for the second quarter of 2017, aka the three months to June 30. Here's the summary:

  • Revenues of $19.3bn (£14.8bn), down five per cent from the year-ago quarter. That's slightly less than analysts expected. IBM pulled out the following numbers to brag about them:
    • Overall cloud revenues of $3.9bn (£3bn) were up 15 per cent year-over-year.
    • Strategic Imperatives, the hand-picked technology areas – such as security and big data – that IBM has hitched its future to, hauled in sales totaling $8.8bn (£6.6bn), a five per cent increase year-over-year.
    • The mainframe titan added that "revenues from analytics increased four per cent. Revenues from mobile increased 27 per cent, and revenues from security increased four per cent" on the year-ago quarter.
  • Here are the various segments that IBM breaks out in detail:
    • Cognitive Solutions revenues were $4.6bn (£3.5bn), down 2.5 per cent from Q2 2016. Its gross profit margin here slipped to 79 per cent from 82.2 per cent a year-ago.
    • Global Business Services revenues were $4.1bn (£3.2bn), down four per cent year-on-year. Again, its gross profit margin fell to 24.9 per cent from 26.3 per cent.
    • Technology Services and Cloud Platforms logged revenues of $8.4bn (£6.4bn), down 5.1 per cent. Its gross profit margin here slipped to 40.6 per cent from 41.6 per cent.
    • Systems revenues of $1.7bn (£1.3bn) were down 10.4 per cent from the year-ago quarter. Its gross profit margin here dipped to 52.7 per cent down from 56.5 per cent.
    • Global financing revenues stood at $415m, down from $424m this time last year.
  • Overall net income of $2.3bn (£1.76bn) was down seven per cent from this time last year.
  • Non-GAAP earnings per share were $2.97, topping analyst estimates of $2.74, thanks to a favorable tax benefit. Without that, the EPS wouldn't be looking quite so good, just five cents over the estimate.

Not surprisingly, IBM boss Ginni Rometty was quick to talk up the portions of her business that actually performed well.

"In the second quarter, we strengthened our position as the enterprise cloud leader and added more of the world's leading companies to the IBM Cloud," Rometty said.

"We continue to innovate, adding RegTech capabilities to our portfolio of Watson offerings; developing solutions based on emerging technologies such as Blockchain; and reinventing the IBM mainframe by enabling clients to encrypt all data, all the time."

What's that, Watson?

Speaking of Watson, IBM got some bad news this month in the form of an analyst report that slapped down the cognitive computing tech as being too expensive to develop and too much of a faff for customers to deal with. This is no surprise: we've heard from industry folk in and outside of Big Blue complaining that IBM Watson is a, at times, confusing ad-hoc marketing brand – a shifting mass of enveloped IBM products – rather than a well-defined, well-executed offering.

Analysts at Jeffries say [PDF] that Big Blue is only barely managing to recoup its costs on Watson research and development, while at the same time presenting a platform that can be tricky to use compared to the competition. As a result, Watson's appeal to customers may be short-lived.

"Our checks suggest that IBM's Watson platform remains one of the most complete cognitive platforms available in the marketplace today," the pundits write.

"However, many new engagements require significant consulting work to gather and curate data, making some organizations balk at engaging with IBM."

Crucially, it's noted that IBM just isn't hiring enough AI experts compared to its rivals, meaning it's potentially hampering any hope of building a future competing product.

"Our analysis suggests that IBM is not likely to win 'the war for AI talent'," the analysts wrote. "We looked at this issue several ways. First, we examined the number of job postings at IBM, Amazon, Apple on relatively level footing – we used the same search terms and filtered on technical positions (removing Sales and Marketing, for example). In this analysis Amazon had more than 10x the job openings compared to IBM. While Apple isn’t really competing in the commercial market, it had over double the total listings vs. IBM."

All in all, the analysts reason, Watson is on course to soon be in the unenviable position of being difficult to install, too costly to develop, and being outdated, making life even more tough for a global sales and marketing team at IBM that has been smashed by layoffs.

"Even under generous assumptions in the base case, IBM is barely recouping its cost of capital. In the bear case value is being destroyed," the financial analysts said. "Should the bull case transpire, our concerns about IBM’s large investments in Watson would be proven wrong, but this piece of the analysis assumes not only that the AI market grows at a robust rate but that IBM also gains share."

IBM's stock was down three per cent in after-hours trading to $149.15 apiece. ®


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