On-premise IT deployments are no longer the most efficient solution for all workloads, and IBM is willingly adapting its portfolio and go-to-market strategy in kind, says analyst.

IBM Corp’s fourth quarter earnings report for 2013, which shows a year-to-year slide in its hardware business coupled with a giant leap in its Internet-based services offering, is a sign the company is clearly transitioning to cloud-centric delivery models, according to one technology analyst.

IBM reported fourth quarter revenue of US$27.7 billion, a decrease of five per cent from the same period in 2012. Net income for the period, including benefits from tax audit settlement,s was $6.2 billion compared with $5.8 billion in the Q4 of 2012. Operating net income was $6.6 billion compared with $6.1 billion in Q4 of 2014.

However, it’s the separate numbers for IBM’s (NYSE: IBM) hardware and cloud businesses that provide a clearer picture of the company’s direction in the near future, according to Krista Macomber, analyst for Technology Business Research, a company that focuses on computer and networking equipment companies.

“While revenue from IBM’s hardware business, systems and technology group sank 25 per cent year-to-year to $768 million, the vendor reported its cloud revenue grew 69 per cent over the timeframe to $4.4 billion and that its annual as-a-service revenue run rate surpassed $2 billion,” she said. “If ever a bellwether, IBM’s Q413 financial performance reflects industry disruption by adoption of public cloud delivery models and software-defined commodity hardware.”

Since IBM’s large enterprise customers will continue to require on-premise servers, storage and networking equipment, the company will remain committed to this core customer base.

“However, on-premise IT deployments are no longer the most efficient or effective solution for all workloads, and IBM is willingly adapting its portfolio and go-to-market strategy in kind,” said Macomber.

She said IBM’s recent announcement that it will spend $1 billion on its Watson artificial intelligence computer system and another $1.2 billion on expanding its cloud infrastructure capabilities are “a function of this changing IT landscape and will spearhead IBM’s transition from an outsourcing company to an outcomes-based vendor over the next two years.”

Watson equips IBM with a near-term technology differentiator as well as long term revenue opportunities. The company’s suite of public cloud infrastructures serves as a buffer for IBM against Amazon Web Service’s entry-level public cloud offerings.

Earlier this week, IBM announced that it was refreshing its X-architecture for X86-based servers. The company said the sixth generation improvements of the architecture are aimed at analytics and cloud workloads.

Macomber said the upgrades are necessary to provide the architecture the needed flexibility to meet current business requirements.

“IBM will use its next-generation System X architecture, X6…to maximize its touch points in mission critical cloud and big data workloads,” she said. “While competition such as Dell, are competing on price for market share, IBM is focused on addressing the IT and business outcome requirements of its core large enterprise base…”

TBR, however perceives that IBM is having some difficulty in the storage space. The company’s Q4 for 2013 slid 13 per cent year-to-year due to declines to legacy OEM mid-range offerings and pricing pressures in the high-end.

Macomber said IBM sees flash as way to stabilize storage revenue, but warned that the flash marketplace is already crowded.

She said IBM needs to successfully communicate cost benefits that its products offer and to justify the higher price tag of flash as opposed to disk alternatives.

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