Why Is Watson Failing To Deliver For IBM?

It has been a few years since IBM (Nasdaq: IBM) started talking about its turnaround strategy. Recently reported disappointing third-quarter results have not pleased its investors. The market is losing patience, and the stock reported the biggest decline in the last four years, tumbling to early 2016 levels.

IBM’s Financials
Revenues for the quarter fell 2.1% over the year to $18.8 billion, missing the Street’s estimates of $19.1 billion. Adjusted earnings of $3.42 were, however, better than the market’s forecast earnings of $3.40.

By segment, revenues from Cognitive Solutions, which includes solutions software and transaction processing software, fell 6% to $4.15 billion. Global Business Services revenues grew 1% to $4.13 billion and Technology Services & Cloud Platforms revenues fell 2% to $8.29 billion. Systems revenues grew 1% to $1.74 billion and Global Financing revenues were down 9% over the year to $388 million.

Among some key metrics, Cloud revenues grew 10% over the year to $4.5 billion, significantly short of the 20% growth delivered a quarter ago. Overall revenue from strategic imperatives improved 13% over the last twelve-month period to $39.5 billion, compared with the 15% growth reported last quarter. For the quarter, IBM revealed that signings fell 21% to $8 billion and Services backlog fell 3% to $113 billion.

IBM reiterated its EPS expectations of $13.80 for the year, which was short of the market’s forecast earnings of $13.84 per share.

IBM’s Watson Woes

The market is clearly worried about IBM’s ability to deliver on some of the key technology trends. Cognitive Solutions, which includes Watson, was one of the worst performing segments for the company during the quarter. IBM attributed the decline in the segment to the timing of closure of larger transactions and “secular shifts” in the collaboration, commerce, and talent software markets.

According to a Morgan Stanley survey, those who want to evaluate AI tools for their businesses grew to 45% compared with 35% a year ago. But this growth is not moving in IBM’s favor. The report found that businesses were more inclined to use Amazon as a preferred vendor over IBM. Amazon’s Machine Learning service via AWS saw interest grow to 27% from 24% a year ago compared with a preference for IBM falling from 33% to 24%.