Cloud Drives Growth At IBM, SAP, Microsoft

by CXOtoday News Desk    Jul 22, 2015

cloud

Cloud computing is becoming the growth engine for global corporations such as IBM, SAP and Microsoft whose software sales are seeing a steady decline every quarter. The recent quarterly revenue figures posted by several companies show a grim outlook in their traditional software business, a key reason they are upbeat on shifting to the cloud. Analysts believe, continued investment in cloud computing and analytics will not be slowing down any time soon and that’s where tech majors are cozying up to.

How cloud is saving IBM

IBM for example reported its 13th straight decline in quarterly revenue while it continued to funnel money into IBM’s “strategic imperatives,” which includes its cloud computing and data analytics business.

For the quarter ending April-June, IBM clocked a$20.8 billion in revenue, a 13.5% decline from the $24 billion it generated in the same time period a year earlier. It has been reported that the company’s software business was responsible for a big part of the drop. Revenue in that division fell to $5.8 billion from $6.5 billion the previous year. IBM’s global technology services group saw quarterly revenue decline of 10.5% to $8.1 billion from the $9 billion it clocked in the year-ago period.

In contrast, revenue from IBM’s cloud business rose 70% in the quarter while revenue from analytics gained 20% for the same time period. IBM CFO Martin Schroeter believes the cloud investment would generate high returns in the coming quarters. 

Technologies such as cloud computing, big data, security, and those IBM believes falls  into the “strategic imperatives” category brought in $25 billion and represented 27% of IBM’s total revenue in 2014. By 2018, he said IBM is on track for these initiatives to generate $40 billion and account for 40% of sales by 2018, he said.

Microsoft’s tryst with cloud

Microsoft has reported a $3.2 billion quarterly net loss, its biggest ever, as the company wrote down its Nokia phone business and demand fell for its Windows operating system. The company took a charge of $7.5 billion in the fourth quarter related to the restructuring of its Nokia handset business, which it bought last year.

Under Chief Executive Satya Nadella, the company has been shifting its focus to software and cloud services as demand for its once-popular Windows operating system slows. In the last quarter, Microsoft’s Commercial Cloud revenue grew 106%, and in the two quarters before that114% and 128%, respectively.

The cloud-first company’s corporate cloud business grew 88%, with strength in Office 365 and Azure. The consumer cloud business is doing well too, with more than 1 million new customers signing up every month.

“It is clear that we have success moving people to the cloud,” CEO Satya Nadella said during a call with investors.

Cloud services are a critical part of Microsoft’s turnaround strategy. In the face of shrinking PC sales, by building cloud services for individuals and big companies that work best with Microsoft’s software, the company has a chance to keep existing customers and hopefully gain new ones.

SAP betting on cloud

German business software maker SAP too generated reported mixed quarterly results on Tuesday as revenues topped expectations due to a surge in newer, lower-margin cloud software delivered via the Internet, pushing down profit to the very low end of forecasts.

In a Reuters poll, SAP said second-quarter operating profit, excluding special items, rose 13 percent to 1.39 billion euros ($1.50 billion), the bottom of analyst estimates ranging from 1.39 billion to 1.45 billion euros.

SAP is battling alongside established US software makers such as Oracle, IBM and Microsoft to boost internet-based software sales and fend off pure cloud-based rivals Salesforce.com, Workday and, less directly, industry pacesetter Amazon.com’s web unit. SAP’s cloud subscription and support revenue from continuing operations jumped 129% to 555 million euros from 242 million euros in the second quarter of last year. On the same basis, revenues from its mainstay software license business rose 13% to 3.51 billion euros from 3.12 billion euros. Without currency effects, software licenses grew 3%.

The big gains

While security, reliability and compliance issues often deter its adoption, there’s a clear silver lining these companies see in the cloud. Another analyst asked about the company’s slumping software sales and whether they reflect the reality that selling software via a cloud computing model produces less revenue than selling software directly to the customer.

While cloud software comes in at slightly lower margins than traditional on-premise software, that won’t be enough to stop these companies to the cloud. Enterprises are moving beyond the hype of cloud computing, putting in the hard work of launching new business models while driving top-line revenue growth.

As an Oxford Economics study predicts 69% of enterprises expect to make moderate-to-heavy cloud investments over the next three years as they migrate core business functions to the cloud. This would means there’s a lot more opportunity for global tech giants to bet big on the cloud.