Partners Pin IBM's Financial Troubles On Slow Transformation

IBM investors gave Big Blue a thumbs down Monday on news the company has suffered 10 consecutive quarters of falling revenue as it stumbles to execute CEO Ginni Rometty's bold transformation strategy.

But IBM partners said the $100 billion goliath's financial fumbling is fine with them as long as products, technologies and its roadmap stays the transformation course.

"My IBM business is up on all core IBM pillars, from information management, Power, storage, to services," said Chris Pyle, president of Boca Raton, Fla.-based IBM partner Champion Solutions Group.

[Related: Double Whammy: IBM Sheds Chip Unit As Financial Woes Hit Hard]

IBM on Monday reported third-quarter revenue down 4 percent from a year earlier to $22.4 billion. The quarterly results came the same day IBM shelled out $1.5 billion to offload its money-losing chip manufacturing business to Globalfoundries.

The sale to Globalfoundries was both an attempt to stem the business unit's financial losses, which were estimated to be $1.5 billion annually. It also fulfilled IBM's commitment to jettison any low-margin commodity parts of the company that didn't contribute to Rometty's transformation strategy to focus on high-margin cloud, analytics, mobile and social solutions. The deal with Globalfoundries follows IBM's $2.1 billion sale of its commodity x86 server business to Lenovo in September.

’We are reinventing and we are managing this company for the long term,’ Rometty told analysts Monday on a conference call.

She called IBM's earnings "disappointing" and said the company was experiencing strong headwinds amid "unprecedented change."

IBM partners Monday were quick to come to IBM's defense.

"IBM is a $100 billion company. You are talking about a company with decades of legacy business and 400,000 employees. You can't expect Ginni Rometty to yell out 'we are taking a hard left' and for it to turn on a dime," said Russell Schneider, a consultant at Jeskell Systems, a large IBM Premier Business Partner.

"Ginni is not one of these quick turnaround CEO's for short-term investor gains," Schneider said. "The IBM board expects her to transform the company and position it in high-value and high-margin businesses. That's at least a five-year journey," Schneider said.

The company has seen back-to-back quarters of negative growth and there's likely another three years of choppy waters before it hits its' stride, partners said. Bets made now on devices, cloud, software, analytics and services were just beginning to take root, they said.

NEXT: IBM Is Its Own Worse Enemy

IBM's poor Q3 performance were tied mostly to its Systems and Technology Group, which included the company’s former x86 server business and Power systems divisions, that experienced a revenue decline of 15 percent. Also down was IBM's software revenue, down 1.6 percent from a year earlier, and its business services segment, which was off 2.9 percent from a year earlier.

Investors sent IBM's stocks tumbling Monday, when it closed down about 7 percent to a recent market value of $168.69 billion. Meantime, partners applaud strides made in IBM's transformation, but acknowledged any additional gains to be made will be challenged by growing pains.

"Take a look at IBM's cloud strategy. Before SoftLayer IBM's cloud strategy was inadequate," said a longtime IBM partner that asked not to be identified. "SoftLayer is a big improvement. But even so, there's confusion in the marketplace over pricing and long waits for quotes."

IBM's hardware business, while evolving, is also hitting speed bumps as Big Blue refines its pitch to the enterprise with its Power ecosystem, post-sale of its x86 server business to Lenovo.

"They are moving in the right direction, but taking a lot of hits while doing it. All those pin pricks are adding up and starting to hurt. IBM has been laying people off, shuffling staff around and selling business units. Of course, it's starting to impact them. But it's not for the lack of strategy," said the IBM partner that asked not to be identified.

What gave Pyle pause was the timeline on IBM's turnaround. He said his IBM business was strong with growth in Power systems, storage and information management. When it comes to partners and an industry in transition, Pyle said, "It's a skittish IT landscape out there. IBM's ahead of the market. But apparently customers are a little further behind (IBM) than I thought."

Pyle said IBM's transformation makes perfect sense for his business, pointing to the sale of IBM's chipmaking business to Globalfoundries as a perfect example.

"IBM is focused on what it does best -- technology. And Globalfoundries is focused on manufacturing and scale," he said. "That's a win for partners and for our customers."

The sale of IBM's chip business would have no material impact on Pyle's business except for possible increased adoption of the Power ecosystem, better chip pricing and availability of processors from Globalfoundries.

He said Power on Linux is just beginning to gain traction over similarly priced x86 server solutions from Intel.

"Anyone running Oracle, Hadoop or analytics are doing their customer a disservice if they don't at least consider Power," he said.

Tom Rosamilia, senior vice president of IBM Systems and Technology Group and Integrated Supply Chain, reiterated the company's commitment to Power systems during a call with analysts and media Monday.

"This [Globalfoundries sale] really furthers IBM's long-term strategy here at IBM. ... Make no mistake we are fully committed to Power systems and we will continue to deliver on our roadmap on these systems in the marketplace. … Today's agreement is another step in (IBM's) transformation," he said.

PUBLISHED OCT. 20, 2014