IBM a Tech Giant - How it Lost its Way

 IBM a Tech Giant - How it Lost its Way

Key Indicators 

• Market Cap – $129.39Bn
• EV – $173.4Bn
• Debt - $57.5Bn, Cash - $17.9Bn 
• P/B – 8.57 
• P/E (Trailing) – 60.44 (Growth) 
• P/E (Forward) – 14.3 (Div. Centric,  No Growth)
• Economic Moat: Narrow (under threat)  

Where is the Growth

How it Lost its Way

• IBM a more than 100-year-old company that used to be a trendsetter in the technology space has become a laggard and is struggling to get its Mojo back. It is facing headwinds, and it is not clear how it will modernise its business. Today, IBM has 3 business segments, Infrastructure, Software and Consulting, and all of them are declining YoY. There are multiple reasons why IBM's revenues are declining except for the minor surge in 2021, and 2022. Let's look at the key reasons.
• Unlike its peer group players like Salesforce and ServiceNow which specialises in providing packaged application software in the Cloud (SaaS), IBM has no application software to offer. Instead, IBM's software offering is primarily in system software, such as middleware, database management systems, and operating systems, that are used to build applications, but it has no end-user applications to offer. To add further, the issue with IBM's system software business is that it is increasingly moving towards open-source software, like how its other peer, Oracle is facing headwinds in the Database domain. IBM's Red Hat Enterprise Linux is built on open source and is cheaper than the company's legacy proprietary software. 
  
• Microsoft, it's another peer, that competes with IBM in the Enterprise IT, has developed a mousetrap around Windows OS and its MS Office offering for both consumers and businesses. IBM, on the other hand, has no such product. Its other distant peer group players like Google and Meta, unlike IBM, earn most of its revenue from advertising.
• The IT spending in OPEX has been flat since the augment of Digital Transformation in the early 2010s. Most of the IT spending is CAPEX-centric for corporates to transform their businesses by rolling out customer-centric applications in the cloud and reducing the spending on system upgrades like Mainframes. In a way, the IT spending profile has significantly changed from being OPEX and IT-centric to CAPEX and business-driven. To add further, the Cloud first approach by businesses got a boost during the pandemic for resiliency and agility, ensuring that the likes of AWS and Microsoft extended their market share. In comparison, IBM has been relegated to a Cloud Consulting business where they help implement AWS, Azure and Google Cloud for their clients. This change is validated by IBM's Cloud market share decline from 25% in 2016 to 4% in 2022, indicating a lack of success in its effort to be a major player in this segment.
• IBM ventured into the AI industry during the early 2010s, introducing its Watson platform. However, the platform's performance was lacklustre, resulting in IBM selling its Watson Health initiative at a significant loss. The company is now making a fresh push into the market by relaunching Watson with the new name of watsonx, keeping in mind the current trend of Generation AI. IBM had previously rebranded its flagship database from DB2 to Db2 to rejuvenate it, but the move led to its downfall, especially among developers. IBM is now attempting a similar strategy with its AI offerings. It remains to be seen, whether rebranding will help IBM boost its AI efforts and achieve much-needed growth.
• During the mid-1990s, IBM decided to shift its focus from hardware manufacturing to the IT Managed Infrastructure Services sector, to drive growth in its software and consulting businesses by moving up the value chain. This strategic transition was necessary to meet the changing needs of customers who were moving away from mainframes and towards commodity hardware-enabled servers. However, in recent years, the IT Managed Infrastructure Services industry has experienced a decline due to the emergence of Hyperscalers and a change in IT spending. Today, most of IBM's original mainframe customers have shifted to the cloud or on-premise commodity hardware platforms for new application development, adding to the company's current challenge of finding ways to drive growth.
• IBM's IT Consulting segment has maintained a steady performance, with operating margins staying flat at 10-12%. The company has been pushed by market forces to shift its focus from providing consulting services solely based on its products to helping clients implement software from other companies. This shift is similar to the approach of a System Integrator. Despite IBM's attempt to emulate the cost arbitrage model of the leading Indian SI players, it has not been successful. Additionally, the margins in the consulting business have decreased, whereas the software business provides healthy margins due to the negligible marginal cost of selling an additional unit.
• To summarise, It's unsurprising that IBM is undervalued in comparison to its peers, given the various aspects that have been discussed. Wall Street analysts view IBM as a dividend stock with limited potential for capital growth, which is reflected in its forward PE of 14 and the market cap of $129Bn only, 18 times less than Microsoft's market cap of $2.4Tn.

My other posts on Generative AI and Strategic Analysis of Key Players

• AI Value Chain 
• Amazon the King of Retail -WhyAWS is the Crown Jewel
• Microsoft the King of AI in Software, Salesforce under the AI Cloud 
• Tesla - It's not a Car, It's an AI Device on Wheels
• Google the King of Search - What the Future Beholds in the AI World
• Nvidia Godfather of AI - Why the Market is Bullish
• Generative AI can transform Telecoms, Energy and Utilities

Source: SeekingAlpha, Bloomberg, Martinfowler.com, Databricks.com, Nvidia, Google, AWS, Fourweek MBA Blog, Amazon, Ashwath Damodaran, TSMC

Aussie Broadband's FY23 Results

 Aussie Broadband's  (ABB) FY23 Results and Why it's Emerging as an Acquisition Target

• NBN
• Consumer
• 2019, 100K customers, unprofitable. 
• 2023, 700K customers, NPAT of $37Mn.
• 65% of Revenue from the consumer segment.
• 12% of NBN customers are on >  $100/month plan and 40% of Aussie customers are in this segment. Aussie acquires more than half of all new high value subscribers to the NBN.
• Business & Govt
• Business segment grew by 8% to $90Mn Rev. EE is adding to margin growth
• >800 new deals – SMB is driving it 
• Both segments utilise wholly owned fibre and an internally built cloud platform to generate 50% GM against residential GM of 30%. As those segments grow, profits will disproportionately rise.
• Smallest telco to build its own fibre backhaul.
• Built in house software to manage data loads, billing and other core functions.
• Wholesale
• business offers white labelled telco services to 3rd parties like Origin, was its fastest growing segment and a genuine surprise. Revenue rose 60% to over $100Mn and maintained 30% GM. Management expects margins to rise as more partners use the service.
•  Cloud
• With 2 new data centres added to the business, growing fibre and a bespoke cloud platform, there is little doubt that Aussie aims to build a capability to sell cloud services to enterprise and government. 
• This is ambitious and chances are this will fail. Globally Telcos have struggled with Cloud as HPS’s and Tier 2 Cloud players are far ahead in the game.

Acquisition Target

• ABB is to become a billion-dollar business in the next 2 years. 
• Healthy balance sheet.
• Currently, the EV is $0.946 Bn and with good growth potential for Rev and Margin growth in the next 2-3 years.
• The market share of NBN is around 8%. 

My previous on TPG and NBN Co FY23 Results and its strategic play. 

Source: AFR, TPG, ACCC, ITnews, Reuters, ABB, UBS

TPG Heading for a Challenging Future

TPG Heading for a Challenging Future 

HY23 Results - Key Takeaways

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• The merger with Vodafone was a necessary remedy to the NBN, but it hasn’t lived up to expectations. TPG’s plan for the Vodafone merger was to do what it has always done – cram lots of users through a fixed asset base to raise profits. It hasn’t worked out that way.
• Selling off the wholesale Fibre Business can be likened to relinquishing a fortress, where the installation of the fibre requires minimal capital and new customers translate to higher margins and earnings, with the capacity for expansion being remarkable. This decision can be interpreted as a demonstration of TPG's weakness, rather than one that emanates from a position of strength.
• The business cannot sustain an expensive multi-brand strategy as it shifts towards a pure RSP play. Hence abandoning it.
• The emerging trend of choosing Prepaid mobile over post-paid is reemphasised (MVNO Play). Post-paid ARPU increase primarily from price rise in Jan and Feb.
• The mobile network is underutilised with just 3.2Mn post-paid mobile users compared to 6Mn for Optus and 9Mn for Telstra. This surplus capacity enticed them to go for the MOCN deal with Telstra.
• FW is cannibalising NBN and ADSL subscribers and improving its margin (bypassing NBN). About 0.5Mn premises are on FW. This is a growth area with an addressable market of around 20% of the Mobile Segment. 5G rollout of 3K sites by the EOY and 5K by 2025. 1 site requires 50 weeks to provision. 
• With NBN EE's market-leading position in E&G, business is experiencing stickiness, incremental revenue and higher margin managed services (SD–WAN).
• Learnings from New Zealand in the Mobile segment are acting as a guiding force.  
• IT Transformation (like single billing) has reduced impediments in P2O, O2A and RA, enabling agility in their GTM strategy.

Why the Stock Price is Flat?

TPG's share price has been flat at $5.47, with a marginal rise of 0.03c after HY23 results on August 24.

The critical reasons for this are:

• Growth in the Mobile segment because of roaming charges, rationalisation of plans and price increases to combat inflation.
• Growth in FW bypasses NBN and magnifies the margin.
• Growth in E&G supplemented by Fibre Fast and EE.
• The expected sale of the wholesale arm, Vision Stream, is seen as a value creator in the short term. In the longer term, TPG will face severe headwinds to sustain the business because selling a fortress (fibre infra.) on which the business is built is not a good move.

• By focusing on pure RSP play in fixed access, the company has positioned itself as a semi-premium player, similar to Virgin Airlines. This strategic approach enables them to provide cost-efficient services without compromising on customer service. Hence consolidating all the brands under one umbrella, streamlining their operations and enhancing their overall efficiency. This is uncharted territory for TPG as they will face competition from both high-end and low-end players.
• In the Mobile segment, they have an underutilised network, hence MVNO play will rise, and they may start exploring other network-sharing deals in the future.
• TPG is preparing itself for a challenging future.

My previous on NBN Co FY23 Results and its strategic play. 

Source: AFR, TPG, ACCC, ITnews, Reuters, UBS

Eight Steps for Every CFO to Apply in Recession

 Eight Steps for Every CFO to Apply in Recession

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• Prioritisation - Make a prioritised list of the trade-offs in your budget with a reason for why.
• Cloud - Accelerate movement to the cloud, while paying attention to shifting pricing strategies from software providers as prices rise.
• Business Process - Radically challenge workflows and processes to make them faster, simpler, and more agile for the long-term.
• Leverage and Cost Arbitrage -  Fundamentally rethink the way your company leverages humans (locations, hours, part vs full time, in-house vs outsource).
• Digital Talent - Clarify your Employee Value Proposition (EVP) so you are positioned to attract and retain the right digital talent. Aggressively source key digital talent that will shake loose and help accelerate your digital plan
• Digital Investment Roadmap - Develop a future vision of the customer and employee to accelerate the right digital investments for 2025.
• Automation - Invest in predictive and autonomous digital projects that will make the organization faster and leaner.
• Measure and Focus - Narrow the metrics you use to measure and manage digital initiatives to the few that align with outcomes.

Source  Gartner, BCG, Mckinsey, HBR

CIOs - How to Test Digital Skills Development

 

Source: CIO

Post COVID - CIOS Need to Maintain Cost and Revenue Variables