Is IBM Signalling A Large Corporate Spending Pullback -- or a Big Shift to the Cloud?

Last week’s IBM report has really walloped the stock.  It’s down another 1% today after an 8% tumble on Friday.

I went through the transcript on Friday and was surprised to see such widespread weakness in the company.

Far from the way IBM’s CFO portrayed it, this wasn’t a weak quarter that suffered from a few missed deals at the end in software and mainframes.  Nor was it a case – although he tried to spin it this way – of the US government sequester or weak yen hurting big blue.

Listen to these stats from the call and you tell me how you think IBM is doing these days:

-          “Growth markets” revenue was only up 1% in constant currency

-          Disappointing performance in Power X and Storage businesses

-          Total IBM revenue down 3% in constant currency

-          Americas revenues down 3% in constant currency (including double digit declines in Latin America, Brazil, and Mexico)

-          EMEA revenues down 4%

-          Asia Pacific revenues down 1%

-          Declines of revenues in China and Russia

-          Global Tech Services revenues down 2% in constant currency

-          Global Business Services revenues down 3%

-          Information management down 1%

-          Systems and Technology revenues were down 13% in constant currency

-          Cash flow was down $200 million year-over-year

Put this all together, and it’s not a healthy company I see.  Look at the weakness across the globe (especially in Latin America, Russia, and China).

So, IBM – the serial earnings manager – blew its earnings estimates.  What does it mean?

Microsoft also reported earnings last Thursday and positively surprised analysts.  They were actually asked on the call whether they were seeing the same kind of issues that plagued IBM.  Microsoft’s CFO, Peter Klein, tried to use the question to spike the ball on why Microsoft’s offerings were so much more value-added than IBM’s.

So here is the key question: was the IBM report a canary in the coal mine for large-cap multinationals pulling back their spending?  If so, that’s very bearish for the market.

But here’s an alternative explanation: is cloud really killing IBM – and their poor results show how much they’ve missed the boat on the secular shift from big honking IT spending to cloud?

Microsoft – for all their problems with the dying PC industry and the shift to mobile – does have a robust cloud offering which could be helping them vis-à-vis IBM.  Oracle (ORCL) is not as strong in cloud and their most recent results have been likely impacted by this as well, similar to IBM.

Perhaps it’s a combo of both.  However, answering this question has big implications for the market for the rest of the year and for some of these formerly very reliable stocks like IBM and Oracle.

[No positions]