IBM significantly beat estimates to turn in a stunning quarter in terms of financial performance this week. Even their mainframe business was looking impressively strong largely because they’ve repositioned that product towards encryption and security. Generally, when you have two quarters of margin increases and increasing double digit growth in new market areas once they are material (IBM’s Strategic Imperatives are now 45% of their revenue mix) you can declare the turnaround out of the woods and affirm the firm’s direction as sustainably positive. IBM has now basically beat street estimates for EPS for a straight 8 quarters supporting this premise that IBM is fully back into the game but with a very different and far more competitive product mix.
Let’s talk IBM and why they appear out of the woods while HPE, which is undergoing a similar transition, isn’t doing as well.
IBM Executive Training
IBM has the most robust succession planning and executive training program currently in existence. This assures that their CEOs have the breadth they need to understand most aspects of the company, are connected to IBM’s customers, and tend to better hit the ground running even if their predecessor, and this is too often the case, leaves them with a mess.
I can’t overstate this importance because we’ve seen failure after failure of firms ranging from Netscape to Yahoo and HPE (HPE’s earnings are almost depressing) that have suffered because the person at the top, while undoubtedly driven, wasn’t well trained. They didn’t know the companies they were running well enough, the markets the firm was in, and clearly started not knowing where the bodies were buried (where they high priority problems existed). The result is these CEOs thrash till failure trying failed idea after failed idea until their firm fails or their board kicks them out of the office. Meg Whitman, for IBM, has simply been the gift that has kept on giving and it remains fascinating that HPE’s sister company, HP, does far better because HP’s CEO, Dion Weisler, had a far stronger related background.
You can’t downplay the importance of a CEO with the right skills and Ginni Rometty, through her decades at IBM, has developed the right skills. I should note that AMD’s CEO, Lisa Su had similar training and has also outperformed expectations in AMD’s turnaround. Both women were well trained in IBM to take CEO jobs and both are outperforming most of their peers in them.
One of the huge advantages that a CEO, that is a subject matter expert, has is vision.
IBM Vision
Rometty knew early on that IBM’s problem was that the firm, which was designed by Thomas Watson Jr, hadn’t pivoted to new markets under her predecessor. Unlike other companies that seemed to panic and try to become a different version of Apple, she looked at IBM’s portfolio and created a strategy that would transform IBM for new opportunities without having to become some other firm. That was Thomas Watson Jr.’s legacy advice, be willing to change everything but who you are.
IBM transitioned into an Enterprise Cloud power, granted partially because AWS surprised them in government accounts. But the acquisition and merger were executed sharply and the result is that SoftLayer now contributes 20% of IBM’s overall revenue. This represented a pivot to the present and SoftLayer remains nicely differentiated from AWS and far better regarded for those that value security and enterprise level services. Their competitive advantages are AI in the cloud and security.
Watson, which represented IBM’s future, continues to lead the market for AI and IBM has aggressively partnered with NIVIDIA to make sure that remains the case. Watson remains the only AI effort that is both a complete solution and operates at a true enterprise scale.
The most interesting part of the recent financials was the growth of the mainframe, now called the IBM Z series, as a massive encryption engine to prevent the wave of breaches we’ve been having lately. Security grew a whopping 49% largely helped by this mainframe use. This is clearly riding on the fact that security breaches have grown a whopping 556% since 2015.
Wrapping Up:
IBM has pulled out of the tunnel and now is accelerating as a very different company than the one Ginni Rometty took over a few years back. Sharp execution and a full pivot to markets of today and tomorrow are typical of a well-trained IBM executives’ skill set and Rometty hasn’t disappointed. The sharp contrast with Meg Whitman at HPE simply showcases that solid skills in mission critical areas coupled with a strong vision is the winning strategy, particularly against a rapidly changing landscape with new, more powerful, competitors like Amazon in it.
Stunning work from IBM this quarter and, I expect no less, from the upcoming quarters either.
