What IBM Doesn't Want You To Know

| About: International Business (IBM)

Summary

In fact, my impression of IBM is overall positive, except for one issue: The management.

The following is my interview with IBM.

For cloud stocks, I still prefer Microsoft, Amazon and Google.

I've written many articles on IBM (NYSE:IBM) here at Seeking Alpha. I believe most of my articles painted IBM in a good light. In fact, my impression of the company is overall positive, except for one issue: The management.

After my article pointing out IBM's attempt to mislead investors in its earnings reports, IBM contacted me, offering to answer my questions regarding their cloud services, which I have pointed out in my articles to be IBM's main growth prospect. I requested an interview with a cloud exec but was offered an interview with someone lower in the corporation, so I proposed the interview be done via email instead. IBM agreed.

I compiled both my own questions on IBM's cloud services and unanswered questions I found in other SA articles. I sent them to IBM and later received responses. Some are from unknown parties, while others are from cloud execs, as I've marked below.

The following is the interview in full:

Q: First of all, thank you for the interview. The cloud services sector is relatively new and not yet well understood. I hope that this interview can help IBM clarify multiple issues related to determining who should be investing in IBM for cloud sector exposure.

Today's investors have several choices for gaining exposure to the growing cloud sector. The most important question is one that has been asked many times but rarely answered by an expert within one of the leading companies. So, in your own words, what advantages does IBM's cloud service have over Amazon Web Services?

Jim Comfort, CTO: IBM is recognized by analysts such as IDC, Forrester Research, Technology Business Research, Enterprise Strategy Group and Synergy Hybrid: Cognitive: Industry: Clouds tailored for specific vertical and horizontal domains are not only inevitable, but critical to compete as cloud innovation evolves. We are building them. Aside from building the infrastructure needed for industries to innovate, we also partner with our clients on the cultural and ecosystem challenges they face as they move to cloud, offering them a depth of insight and guidance as they transition.

Q: Same question, comparing IBM with Microsoft Azure instead.

(No response.)

Q: IBM is often considered the most secure corporate service provider. However, this article - granted from last year - implies that IBM's cloud service is perhaps the least secure. Could you elaborate on this issue? Exactly how safe are the data stored with IBM? What type of encryption protocol are you working with and who are the parties that can likely break it (e.g., NSA, CIA)?

David Cass, CISO: Part of the materials which Watson for Cyber Security will learn from is IBM's X-Force research library, comprised of over 20 years of security research, details on more than 8 million spam and phishing attacks, and over 100,000 documented vulnerabilities. With IBM Cloud as its delivery platform, this vast intelligence vault was recently opened up to the public, and serves as the foundation of IBM's X-Force Exchange threat-sharing platform. Through accessing this network, users have visibility into volumes of shared threat data from across the globe, as well as real-time indicators of live attacks.

Q: To date, it appears that the billions of capital invested in your cloud service has not yet returned in ROI. How much of a loss is the service currently running and what is the ETA to break even so that moving forward the service can be labeled a profitable investment for the company and its shareholders?

IBM: As you may have seen in our earnings announcement on Monday, our cloud revenue for Q2 increased 30% and was $11.6B over the trailing 12 months. Our cloud-as-a-Service revenue was up 50%, and we exited the quarter with an annual run rate of $6.7B in our aaS businesses - that's up from $5.4B last quarter. So we have a benefit from the acquisitions we recently closed. We've made 11 acquisitions the first half of this year, and we're up double-digits in R&D.

Q: In the past, most of IBM's revenue came from recurring contracts. It seems, then, customer retention is important for your business and that this should apply to cloud services as well. What is the average subscription length of a client? What is the lock-in period in the average contract? How easy is cancellation and what is the cancellation rate?

IBM: We don't disclose this information related to our client agreements.

Q: With Microsoft buying LinkedIn, the company now has direct access to potential customers. This lubricates the relationship building process for customer acquisition and will likely pay off in their cloud business. What about IBM? Known as a reliable consulting company, IBM should have strong closing rates with its prospective clients. Thus, an important question is: How much of your marketing efforts are direct contact from IBM compared and how much is outsourced?

IBM: Our marketing efforts are multi-faceted with a targeted approach to the respective needs of a broad spectrum of clients that range from the traditional IT enterprises to what we see as a growing digital, cognitive economy.

Q: In many metrics, IBM is not exactly winning the cloud wars. But perhaps investors are watching the wrong metrics. What metrics would you advise interested investors to watch as indication of IBM's success in the cloud sector?

IBM: Actually, IBM is not only keeping pace, but is emerging as a top three player in cloud across public, private and hybrid cloud deployments. Two independent reporters from TBR and IDC named IBM a leading IaaS provider, and another report by TBR also ranked IBM a top three player in several cloud categories, including most widely adopted cloud platform.

Q: Finally - and somewhat unrelated to the cloud but of interest to me and likely to many other investors - I am a fan of Watson and other NN-based attempts at AGI and their practical uses. Has Watson solved any problems within IBM that you're able to discuss? More practically: Is Watson helping IBM in reducing costs or increasing efficiencies?

IBM: Happy to know you're a Watson fan. Yes, Watson is indeed helping to increase efficiencies within IBM. Here are a couple of examples of that:

· Supply chain: IBM is using Watson and large amounts of weather and location data (IBM acquired The Weather Company's digital assets last year) to improve its supply chain risk management program. Click here· Programmatic campaigns: IBM is also using Watson to reduce costs in within its ad buying programs. Click here for more details.

How did you feel about this interview? If you are like me, you felt that it was rather uninformative. It almost looked like boilerplate ripped right from IBM's website…

…and in fact, some of it was! I copied a couple phrases from the answers and found the exact same sentences on the IBM site! When I asked IBM about this and about the other vague answers to specific questions, I received denials and the following, which I am obliged to add to this interview:

Melinda Zurich, External Relations: If you're planning to criticize our email response in your article, we ask you to include that we offered to put an expert on the phone with you directly and you declined.

…which was what I asked for in the first place.

My takeaway from this interview is merely more solidarity in my original thought on IBM: Great company, awful management. Are these concepts mutually exclusive? No, but they are correlated.

For investors who have unanswered questions on IBM's cloud competitiveness, perhaps this interview was unsatisfying. I also was expecting more information, as I would like to add to my analysis on my comparison of worthy cloud investments. But for now, we must wait until IBM's next earnings report.

For now, investors must decide whether to support the shell or the ghost inside. I think that a good enough machine can run decently even with a poor operator. Even if you were to attempt to bring IBM down from the inside, you would have quite a task on your hands.

The real question is the opportunity cost here. For cloud, I still prefer Microsoft (NASDAQ:MSFT), Amazon (NASDAQ:AMZN), and Google (NASDAQ:GOOG) (NASDAQ:GOOGL).

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Disclosure: I am/we are long MSFT.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.