IBM (IBM) reported its third quarter results this week that failed to meet the market’s expectations. This was the third consecutive quarter of revenue decline for the company as it struggles to navigate through the global pandemic.

IBM’s Financials
Revenues for the quarter fell 2.6% at $17.6 billion, ahead of the Street’s estimates of $14.2 billion. Adjusted earnings of $2.58 a share were in line with market estimates.

By segment, revenues from Cloud & Cognitive Software, which includes Cloud & Data Platforms such as Red Hat, Cognitive Applications, and Transaction Processing Platforms, grew 7% to $5.6 billion. Within the segment, Cloud & Data Platforms grew 20% driven by Red Hat.

Revenue from the Global Business Services (GBS) segment, which includes Consulting, Application Management, and Global Process Services, declined 5% to $4 billion primarily due to decline in Application Management and Consulting. Revenue from Global Technology Services (GTS), which includes Infrastructure & Cloud Services and Technology Support Services, declined 4% to $6.5 billion.

Revenue from its Systems segment, which includes Systems Hardware and Operating Systems Software, declined 15% to $1.3 billion, and Global Financing revenue declined 20% to $273 million. IBM is not providing an outlook due to the current market conditions.

IBM’s Partner Network

During the quarter, IBM announced several innovations to Red Hat and Quantum. To extend its open hybrid cloud portfolio, Red Hat introduced new capabilities. OpenShift Virtualization allows clients to migrate and run virtual machines within Red Hat OpenShift.

Advanced Cluster Management for Kubernetes will deliver a robust multi-cluster, policy-based compliance and application management system. The enhancements will allow IBM clients to “build once, deploy anywhere” within the hybrid cloud environment.

For Quantum, IBM announced a roadmap to reach 1,000-plus qubits by 2023. IBM Quantum is the leading quantum computing technology aimed at solving complex problems that the world’s most powerful supercomputers cannot solve. As part of the roadmap, IBM’s team is developing a suite of scalable, larger, and better processors with a 1,000-plus qubit device called IBM Quantum Condor that will house devices even bigger than Condor.

The plan is to build a million-plus qubit processor that leverages industry expertise, agile methodology, and is a full-stack quantum computer deployed via the cloud that anyone around the world can program.

IBM also announced an expansion with its partnership with ServiceNow (NOW) to help companies reduce both operational risks and costs by automating IT operations with AI. As part of the agreement, IBM Watson AIOps and ServiceNow’s IT Service Management (ITSM) and IT Operations Management (ITOM) offerings will be provided in an integrated solution supported by IBM Services’ expertise in enterprise transformation.

IBM will also apply its AI capabilities from IBM Watson into the workflows and data from ServiceNow’s Now Platform to leverage automation and drive overall efficiency. The new joint solution will become available later in the year.

IBM’s Acquisitions

IBM continued to acquire during the quarter and announced plans to add WDG Soluções Em Sistemas E Automação De Processos LTDA, also known as WDG Automation, a Brazilian software provider of robotic process automation RPA. Terms of the deal were not disclosed.

WDG Automation is known for its RPA, intelligent virtual agents (IVA), and artificial intelligence software. Its technology has been designed for business users to create automations using a desktop recorder without involving complex coding or IT teams. These software robots can be run on-demand either by the end user or can be scheduled to run using an automated scheduler.

IBM plans to embed WGA’s RPA capabilities into its existing AI-infused automation capabilities across business processes and IT operations. This will allow its customers to have broader access to intelligent automation through software robots and will help IBM deliver more intelligent enterprise workflows.

IBM’s Restructuring

Earlier this month, IBM announced plans to spin off the managed infrastructure services portion of its Global Technology Services unit into a standalone public company, temporarily named as NewCo. Post the spin-off, IBM will become a hybrid cloud platform and AI company with $59 billion in annual revenues, and NewCo will provide managed infrastructure services and generate nearly $19 billion in annual revenue.

NewCo will deliver traditional infrastructure outsourcing services, transformational services such as infrastructure modernization, public and private cloud management, security, IoT and edge, and innovation services with data and AI integration. Meanwhile, GTS’s technology support services including the entire GBS segment that includes consulting, global process services, and application management services will remain part of the new IBM and will focus on becoming a leader in hybrid cloud platform and AI.

The move will be helpful in improving IBM’s core business financials. It is essentially eliminating its shrinking, low-margin operation that analysts believe is “cannibalizing impact of automation and cloud, masking stronger growth for the rest of the operation." The entire transaction is expected to be completed by the end of fiscal 2021.

IBM’s spin off into two entities will give it the ability to focus on growing the high growth AI and cloud segments. I think if IBM wants to make it big in this market, it will have to make some bold acquisitions. It should look at companies like Splunk (SPLK) to expand its enterprise analytics services.

Within the enterprise cloud, acquisition of ServiceNow could have been an interesting move, but with ServiceNow’s market capitalization at close to $100 billion, IBM may not really be able to afford it. IBM could look at Atlassian (TEAM) to help it get a big break in the enterprise segment. At $50 billion, it will still be quite a big buy for IBM.

Its stock has been recently trading at $117.37 with a market capitalization of $102.5 billion. It touched a 52-week high of $158.75 in February this year. The market turbulence in March had sent the stock falling to a 52-week low of $90.56.