IBM and Union Pacific results tell different sides of digital transformation story

Summary

Cyberhedge 5-Star rated Union Pacific (UNP) Q3 results announced last week saw year-on-year a drop in net income of $1.4 billion (from $1.6 bn in Q3 19’), and operating revenue of $4.9 billion was down 11% in third quarter 2020 compared to third quarter 2019. But YTD free cashflows (FCF) were up to ~$1.93bn (compared to $1.83bn in 19’) due in part to a 58.7% operating ratio, an all-time quarterly record for the company. This included +11% increase in locomotive productivity and +13% increase in worker productivity — both key metrics for the company’s Unified 2020 Plan.

Meanwhile IBM’s quarterly results are emblematic of the larger trends powering digital transformations globally, namely the transition to the cloud and away from legacy IT infrastructure. Big Blue’s revenue of $17.6 billion was down 2.6% while total cloud revenue of $6.0 billion was up 19% YoY.

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Analysis

UNP continues to be a 5-Star company that has performed well despite macro headwinds. Despite across the board declines in the shipment of key products, Union Pacific’s strong financials and solid technology management program continue to put it in a better position to weather the COVID‑19 crisis relative to its peers in the Industrials sector. FCF continues to hold up despite the drops in net income and revenue, and progress against its Unified 2020 goals are evidence of continued strong execution of the company’s Digital Transformation.

IBM’s results are emblematic of the shift to the cloud, perhaps as much as any company globally. It is fighting against the narrative of ‘declining IT spend’ across corporates as it tries to further reduce its legacy IT business and trails its three largest competitors, AWS, Azure and Google Cloud by a wide margin.

Results come amidst what CEO Arvind Krishna has called the ‘most significant shift’ in the company’s business model in its 109-year history. According to some experts, IBM was ‘10 years too late’ to the cloud market. But while it may have been late to make this shift, its recent decision to split into two companies to enable a focus on cloud was rightly applauded by the financial markets.

Two traditional giants from two different sectors but one common story: digital transformation and the accelerated shift to the cloud — is disrupting every sector. Leaders like traditional industrial power Union Pacific are leveraging digital in a way that is making the company more resilient to external shocks while another traditional IT giant, IBM, is struggling to catch up.

Irrespective of the sector, digital transformation is a major market difference maker and will continue to be one in this Future Economy.

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Denis Bolshakov

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