IBM Income Analysis. Blue Turn Red

source: freepik

Our IBM income analysis begins with the declining trend of its Intellectual Property business. In the last 6 years, this “segment” decline more than 60% – a little bit ironic for the firm that is always at the top of the patent recipient in the world every year.


The investor has used to get bad news for IBM, but 2020 keeps its surprise. The mainframe industry – the core of IBM business – may be cyclical, but the number is too low even from that lowest expectation. Is there anything else we could find in this mud?

IBM Income Analysis: In This Issue

  1. License to Fail. Intellectual Property
  2. The Blue Cloud
  3. The Bigger Picture
  4. Machine Efficiency
  5. Key Takeaway

With a team of 250,000 scientists, researchers, engineers, developers, and technologists, let’s talk about the “patent” business first.

Intellectual Property. License to Fail.

Last year, IBM recorded another impressive milestone. 28 years in a row, IBM has become the world leader in patent IBM with more than 9,130 US patents. Unfortunately, this innovation lead isn’t followed by its financial performance for the related segment. In the full year of 2020, IBM’s licensing business records its lowest point since 1996.

Wait, what is IBM’s intellectual property business actually? How IBM makes money from this business model?

As we said earlier, IBM has a very vast array of patents and they get paid when the patent gets sold or used. For instance, IBM gets paid a small fraction of hard drive sales from Toshiba or another HDD manufacturer since IBM has a patent for magnetic storage. Another example is LASIK surgery, IBM has patented this method to “reshape” the cornea tissue, fixing myopia or hyperopia – so every time this method is used, IBM collects the money.

IBM patent for LASIK
source: freepik

Another trick to monetize is to sell the patent for a one-off like when Twitter buy 900 patents from IBM in 2013. Right now IBM is working hard on patenting AI, cloud technology, machine learning, and other new stuff in the tech world.

Honestly, we don’t know why this “segment” declined. As we always know, innovation doesn’t always pick us to commercial aspects. It could be “not yet”, or it could get legal challenges like Apple and Qualcomm in the modem battle. For the reader who doesn’t know this epic battle, we tell you that every time a phone maker sells its smartphone, Qualcomm has “royalty” from the wireless connection. Then Apple protested and said this isn’t a fair business, and you know the end of the story.

Right now IBM faces a challenge with a coffee delivery drone.

Ok, we aren’t sure what really happens. Thing is, this money-printing machine is slowing down, and it is not a good sign. To put more pressure, this is one of the strongest aspects of IBM’s competitive advantage. As investors, we may ask, if the strongest do not get the job done, how about the others?

From a financial perspective, the licensed business contributes almost 10% of operating income, thus a drag in this area will affect the firm’s total earnings and give a more blur picture.

The Blue Cloud. IBM Income Analysis in Segment

We move to the brightest spot of IBM business – at least according to their own statement. IBM Cloud and Cognitive Segment are the cornerstones of the comeback narratives for IBM, like Microsoft, Satya Nadela, and Azure; so, it is Arvind Krisna, another Indian – American, and Bluemix. The transformation to reinvent their identity – and for this reason, IBM will spin off its sweet spot and we are eager to see how it is going.

IBM Income Analysis: Cloud Segment
IBM Cloud Segment. Number in million.
IBM Income Analysis: Segment Analysis
It is suspicious, why IBM didn’t reveal The Cloud as a single entity. Why did in 2018 The Cloud record along with Technology Services while in 2020 it recorded along with Cognitive Software?

Tracking its financial report, I have to say it is difficult to “isolate” cloud growth since IBM recorded it all together with Cognitive services. For the last 5 years, this segment’s revenue grows by 10% CAGR – this is the only segment with positive growth for IBM.

Regarding this trend, Krisna could say that the firm is in transformation mode, but we aren’t in hurry to agree with his narrative. IBM’s acquisition of Softlayer and Red Hat is a good decision, but we don’t see it could take market share from the frontrunner – AWS and Azure, or even from Oracle or Google Cloud. And of course, it doesn’t mean that Red Hat is a flop since we strongly believe that there is a lot of company – especially Fortune 500 company – which has IBM-centric infrastructure.

Again, this large client base will ease IBM to cloudify its client company.

IBM Income Analysis in Bigger Picture

IBM’s earning trend is a mix, upside and down following the cyclical nature of their client – said IBM. But we don’t agree. Tracking back from earning to revenue, the picture is getting worse.

IBM Income Analysis: Earning trend
IBM earnings since 2016.
IBM Income Analysis: Revenue per segment
IBM revenue per segment

As we can see – and the reader guess, the other segment of IBM is in declining mode. BM can’t blame a declining market for its shrinking sales. It is ironic since according to Statista, the global CAPEX for Information Technology rises from 3.4 trillion in 2010 to $3.7 trillion in 2020. IBM missed this opportunity, a little bit disappointing for the veteran with 100 years of experience in the digital market – there is something very wrong.

Ok, we not discuss the failure – not yet, most important, now we know that the “mix” trend of earning isn’t the result of the improvement of the big blue sinking ship. It is the result of, using the term IBM like workforce rebalancing. Normal people usually call it a layoff.

Lay off. lay off and lay off had become IBM themes for each year.

Machine Efficiency

IBM has 350,000 employee who works globally, but the domestic portion has been declining – The Blue Machine “outsource” its services to the cheaper workforce from India and Eastern Europe. This is one of the companies that makes Donald Trump bring a “Make America Great Again” slogan.

Digging deeper, the workforce problem is bleaker than we may expect.

The company has fired more than 10,000 employees as Alan Wild, Former IBM Vice President of Human Resources said – and it has done just in the last several years. Digging into detail, since 2013, IBM has fired more than 20,000 staff the age of more than 40 – management said that it is part of the company strategy in order to get a better picture for millennials. For us, it is an effort to get cheaper manpower and to get a better-earning picture in the eye of shareholders.

To pour salt on the wound, the job cut also affect Watson’s division,

Named after IBM founder – Thomas J. Watson – Watson is an IBM machine that mimics human intelligence at a much better scale and speed. Watson is a combination of AI, machine learning, human language, human interaction, and reasoning. Think about this, In 2016, IBM signed a contract with the law firm BakerHostetler to extract billion text documents. Watson’s human language ability help the lawyer to get specific information regarding the bankruptcy-related document.

And.. that layoff also reaches the cloud segment. So this is the hire-fire company, insecure workforce, and declining business.

IBM’s problem with its employee
image source: freepik

IBM Income Analysis: Key Takeaway

  1. Don’t buy, absolutely.
  2. It is interesting to see how and what the cloud spin-off will deliver in upcoming years. Could IBM replicate the Microsoft comeback story? If we have to invest in something related to IBM, the only choice is its Cloud segment after the spin-off.
  3. So far, IBM reached (even they didn’t – sometimes) its earning target by cutting its expense, to be exact, by laying their employee off. We, investors, love efficiency, but cutting jobs too much is an indication that your company doesn’t grow enough – or worse, declining business.
  4. The main problem, despite its competitive advantages, IBM seems difficult to translate into acceptable financial performance.

Actually, it is fun to discuss IBM in another segment, its technology is still far ahead of competitors, like Joan Watson – sorry, Watson we mean. But why do we bother to talk about it if we don’t see the future – yet?

Fundamental Reading

  1. Earning definition from Investopedia