[video] IBM Is Boxed In by Falling Hardware Sales

WATCH: Jim Cramer on IBM Earnings

NEW YORK (TheStreet) -- IBM (IBM) sales continued to fall in the fourth quarter, with hardware leading the way down.

Revenues of $27.7 billion were below analysts' estimates of $28.25 billion, and the company's total sales for the year came in at $99.8 billion, against $104.5 billion in 2012. The total sales for the year barely matched 2010's total of $99.87 billion.

The immediate response was for CEO Virginia Rometty and her top team to forego their annual bonuses. But the problem is much bigger than that.

As I wrote last month, IBM faces a true existential crisis. It's similar to what it faced in the early 1990s when it lost command of PC standards to Microsoft (MSFT). But it's actually worse, because this time there's nothing to fall back on.

The obvious response is to move toward cloud computing, and the $1.2 billion investment announced last week will help.

But no matter how fast it bails out sales with cloud, the leak of sales from hardware seems bigger. IBM's move to sell its server business to Lenovo (OTC:LNVGY) might be a smart move, but it would have been a smarter move six months ago, when the two companies reportedly stalled on price. Today's price may be lower than the previous offer.

In the cloud, meanwhile, IBM is being squeezed both by Amazon's (AMZN) willingness to invest every dollar of revenue back into the main business, and by Google's (GOOG) continuing capital build-out which amounted to $2.29 billion in the third quarter of 2013 alone.

IBM remains committed to bottom line growth, as its earnings release makes clear. Despite falling revenue, IBM grew net income by 6%, to $6.2 billion, and fully diluted earnings by 12%, to $5.73 per share. The release said the company is "on track" for 2015 earnings of $20 per share.

Those goals, in light of falling sales, can't make for great morale among IBM employees. The only way to raise profits and increase capital expenditure while sales fall is to cut expenses. That means reducing the head count.

There are no smug, easy answers here, which is one reason I sold my own holdings in IBM and told readers about it. The company has been making the obvious moves, selling the server business and buying SoftLayer for its cloud business, then investing heavily in it.

But Rometty seems to be reacting to events rather than anticipating them. She rose to the top of the company through the inside, which in normal times makes sense for a company like IBM. But these are not normal times.

Anyone arguing for new leadership at IBM, however, needs to offer a new vision that makes more sense than what IBM is already doing, and what Rometty was pushing for before becoming CEO. Such visions are in short supply, as the Microsoft board knows all too well.

The savings that come from cloud computing go overwhelmingly to buyers of technology. They can now rent huge amounts of capacity at very low costs, in a highly competitive market that is forgoing profits for growth.

IBM has high hopes for its Watson computer. But as even IBM has written, it's really just a fancy front on a cloud running Apache Hadoop -- something you can build in a basement. 

IBM's best hope for growth is to become a dominant provider of Software as a Service (SaaS) using its own cloud. But the leader in that business, Salesforce.com (CRM), is not profitable and had its first $1 billion quarter just last fall.

Even Amazon was estimated to have cloud revenue for 2013 of $3.8 billion, though some analysts were even skeptical of that figure. 

IBM is not a player in devices, the other high-growth area of computing. In the near term, it's hard to see the gap between what IBM needs and what cloud delivers doing anything but growing.


At the time of publication, the author owned shares of GOOG. 

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

 

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