International Business Machines Corp. (NYSE:IBM) or Microsoft Corporation (NASDAQ:MSFT) are both trying to live beyond their legacy businesses. The companies can be seen betting their future on enterprise cloud and mobility offerings. But the question many investors keep asking is which of these two giants offers better hope to the future.
Microsoft jumps over IBM
For years, International Business Machines Corp. (NYSE:IBM)had been leading Microsoft in terms of revenue until one year ago. While Microsoft reported revenue of $93.6 billion in its fiscal year ended June 2015, IBM’s revenue in a comparable period was $81.7 billion, having contracted 11.9% from the previous year.
In the latest quarter, Microsoft reported revenue decline 2% to $25.7 billion and profit rose 8% to $6.3 billion. In contrast, it was all declines for IBM as revenue dropped 8.5% to $22.1 billion and profit fell 18.6% to $4.5 billion in the latest quarter.
New growth markets
Not only has Microsoft overtaken International Business Machines Corp. (NYSE:IBM)in terms of revenue, but the company also appears to be doing well than the competitor in the new market categories. IBM calls its new markets that include cloud computing, analytics, security and mobile Strategic Imperatives. These Strategic Imperatives are supposed to add fuel to IBM’s growth as its legacy business cools. Additionally, IBM sees the Strategic Imperatives as higher-margin businesses.
The company reported that revenue flowing through its Strategic Imperatives rose 17% to $28.9 billion last year, with cloud apparently registering the highest growth at 50%.
However, with International Business Machines Corp. (NYSE:IBM)still reporting topline declines, the Strategic Imperatives don’t seem to be drive growth. It is as though IBM is cannibalizing its existing revenue stream instead of growing revenue. IBM has acquired nearly 20 companies to build its Strategic Imperatives.
On its part, Microsoft has a clearly marked cloud and emerging businesses segment. However, you also get the impression that Microsoft’s claim about its cloud business makes the division look larger than it actually is.
Both International Business Machines Corp. (NYSE:IBM)and Microsoft are struggling to live beyond their aging businesses, but Microsoft’s transformation approach appears to be more inspiring than IBM’s.