Following TSMC’s first shot of the semiconductor industry’s third-quarter earnings report, IBM has also followed closely.
After the market on October 19, Eastern time, IBM released its financial report for the third quarter of fiscal year 2020. After the financial report was announced, its stock price fell by about 3% in after-hours trading. Although the decline in its stock price was not unaffected by the collective downturn of the three major stock indexes, the drop above the broader market also showed the capital market's attitude towards this financial report. As of the publication of the US Stock Research Agency, IBM reported $121.88 per share after the market, down 2.90% after the market, with a total market value of $111.785 billion.
Before the financial report, on October 8, an IBM spin-off announcement shocked Wall Street. Since the news was released as of October 19, its stock price has achieved a 12% increase, which is good news for the long-term downturn of IBM. In recent years, IBM, which has been striving for transformation, seems to have not progressed smoothly. While the new business has not achieved significant results, its main business after years of development has also fallen into a sluggish mire. How should investors view this new financial report?
The year-on-year decline in revenue continues, and the weak hardware business is the main reason
According to the latest financial report data, IBM’s quarterly revenue this quarter was 17.56 billion US dollars, compared with 18.028 billion US dollars in the same period last year, a year-on-year decrease of 2.6%; IBM’s second quarter of this fiscal year’s data was 18.123 billion US dollars, a decrease from the previous quarter. 3.1%.
Judging from the revenue situation in recent quarters, the slowdown in revenue growth and even year-on-year negative growth has become the norm for IBM. In contact with the recent news of layoffs in the market, it has once again conveyed to the capital market and investors a signal of weak development of IBM. Specific to the revenue of each business unit this quarter:
-The revenue of the cloud and cognitive software division was US$5.55 billion, a year-on-year increase of 7%;
-Global business services revenue was US$3.97 billion, a year-on-year decrease of 5%;
-The revenue of the global technology service sector was US$6.46 billion, a decrease of 4% compared with the same period last year;
-The revenue of the system division (including system hardware and operating system software business) was US$1.26 billion, a year-on-year decrease of 15%.
Judging from the segment revenue of the four major departments in this quarter, except for the growth in the revenue of the cloud business segment, the revenue of the other four major business segments has shown a downward trend, which also caused the overall quarterly revenue decline. s reason. In addition, although the revenue of the cloud business unit has increased, it can be seen from the data that its increase is not large.
In the last quarter, the cloud and cognitive software division's revenue was US$5.7 billion, a year-on-year increase of 3%, and the only one of the four major divisions achieved year-on-year growth. Combined with the revenue of this department this quarter, the US Stock Research Agency believes that although the revenue growth of the cloud and cognitive software departments is slow, it also releases a good message. IBM has also made some achievements in the development of this business. progress.
On the whole, the main reason for the weak revenue growth in this quarter is the weak sales revenue of IBM's hardware business, and the hardware business is the main force of IBM's revenue. This quarter’s financial report data shows that the hardware revenue represented by the system department accounts for the total revenue. The proportion was 36.8%, compared with 37.2% in the same period last year.
This part of the reason for the weak revenue, the US Stock Research Agency believes that it is due to the slowdown in incremental demand in the global hardware service market. As the market enters the era of stock, the competition between IBM, Cisco, and HP in the computer hardware market will also become more intense. And under the influence of the health incident, many companies cut their spending on computer hardware services on the enterprise side in order to maintain a better cash flow, which also led to a considerable slowdown in the growth of IBM's revenue in this part.
Cisco, which started as a switch, has the same difficulties as IBM. Its financial report data for the fourth quarter of fiscal year 2020 shows that the sales of infrastructure platforms (providing enterprises with hardware and technical facilities) were $6.626 billion, a year-on-year decrease of 16%. . To some extent, the transfer of global Internet technology from hardware to software is a big challenge for these established technology companies. How to deal with and whether they can open up new revenue growth points will be a great deal The development after the decision.
Net profit in the third quarter increased by 3% year-on-year, and cloud computing investment had little effect
For a technology company, related costs are indispensable, and the amount of R&D investment will directly affect the future development potential of a company. Specifically for IBM, the total operating costs for this quarter were US$6.603 billion, down 3.08% year-on-year, accounting for 37.5% of total revenue; from the previous quarter, operating costs were US$7.129 billion, revenue Accounted for 39.4%.
Although the total operating expenses for this quarter have been reduced, the cost expenses are still not low. In recent years, IBM has vigorously developed its cloud computing business. Compared with other businesses, cloud business expenditure accounts for a larger proportion.
Financial report data shows that R&D-related expenditures this quarter were US$1.515 billion, compared with US$1.553 billion last year, a year-on-year decline of 2.4%, and compared with US$1.583 billion in the previous quarter, a month-on-month decline of 4.3%.
Because the various cost expenditures are still not low, this will also affect IBM's profit margin to a certain extent. According to the financial report data for this quarter, IBM's net profit for the quarter was US$2.3 billion, a year-on-year increase of 3%. Judging from historical data, IBM's net profit has always been under pressure. An important reason for the pressure on profits is expenditure, perhaps because the cloud business is at a higher expenditure input.
From an industry perspective, high investment in cloud business is essential in the early stages of development. Microsoft, Amazon, and Ali, which currently occupy the forefront of the cloud computing market, have also seen excessive investment in the early stages of cloud business development. Judging from the current situation, the fierce market competition environment has also caused several technology giants to dare not relax their investment in cloud computing business, and the capital investment in this area is still not low.
In the second quarter of this year, Amazon invested more than US$9 billion in capital projects including cloud computing; in April, Ali stated in a public statement that it would invest more in cloud computing in the next few years. 200 billion yuan (about 28 billion US dollars) of funds, this investment is equivalent to about 50% of Alibaba's full-year performance in 2019, and in fiscal year 2019, cloud computing business revenue only accounted for about 6.6% of total revenue.
The difference is that the cloud business of the above-mentioned companies has occupied a considerable market share, so the contribution of the cloud business to the profit is much larger than that of IBM. However, due to the slow transition in the early stage, IBM missed a good opportunity to develop public cloud, which resulted in a low share of the global cloud business market and low profits. In addition, like Cisco, too much reliance on hardware business in revenue has also resulted in insufficient competitiveness in the cloud computing track.
The spin-off enters the countdown, where is IBM's road?
In early October, IBM announced that it would split into two companies. After the announcement, IBM's stock price rose by nearly 12% as of the publication of the US Stock Research Agency.
It is reported that the target of IBM's split is its IT infrastructure service department, which will be officially renamed before the end of 2021. The department will complete a backlog of up to 60 billion US dollars from the perspective of an independent manufacturer. This move is undoubtedly in response to the development of cloud technology over the years, hoping to separate from the traditional business and focus on the more lucrative cloud computing field.
According to the 2018 global public cloud market data released by market research agency Canalys, Amazon AWS, Microsoft Azure, and Alibaba Cloud account for more than half of the global market. IBM is significantly behind, with a market share of less than 4%. With the emergence of new technology giants, the new transformation of established technology companies cannot be ignored.
Oracle has been transforming to the cloud computing business under the pressure of weak performance, but it seems to be in a development dilemma like IBM; Dell is also seeking to gain more market share under Apple's dual squeeze from hardware to software; American communications companies that started with telecommunications are also seeking new breakthroughs in the fierce market competition. What will happen to the development of this giant that has been established for more than a hundred years after the spin-off? There are also different opinions on the market. In this regard, the US Stock Research Agency’s views are as follows:
After missing the development opportunity of public cloud, IBM is vigorously developing hybrid cloud business. Although this track is not fiercely competitive with public cloud, many technology giants are already preparing. In terms of operating system products, middleware, virtualization, and cloud technology, Red Hat will compete with companies such as Microsoft, Oracle, VMware, and Pivotal. Among the virtualization tools, operating systems, middleware, service programs, and management combination products, many companies use Microsoft products.
When IBM's revenue growth rate and net profit performance are unsatisfactory, whether IBM has enough funds to develop the hybrid cloud business, the US Stock Research Agency questioned. In addition, the company’s divestiture and operational changes are expected to bring nearly $5 billion in operational expenditures. In the past one or two years, IBM’s cash flow situation may be tight.
Second, from a historical point of view, IBM has done a spin-off in the past, but from the final effect, the situation seems to be unsatisfactory. The network business was divested in the 1990s, the PC business was divested in the 2000s, and the semiconductor business was divested about five years ago because these businesses did not conform to IBM's business integration values.
According to industry analysts, the biggest reason may be that IBM did not “focus” on doing business as expected. Whether this spin-off can achieve the expected results, the US Stock Research Agency believes that it may also be challenging.
In a fiercely competitive environment, especially in the semiconductor industry where the technology is changing more rapidly, only by focusing on technological innovation can it not fall behind the trend of the times. The US Stock Research Agency will also continue to pay attention to whether IBM, which has fallen behind, can return to its historical high point in the future.
Source of this article: US Stock Research Agency