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Time to start calling IBM 'Medium Blue'

IBM (IBM) is going through a massive transition as rapid changes completely retool the information technology ecosystem of its big business customers. IBM has done it before but almost four years into CEO Ginni Rometty's tenure, it's increasingly clear that the company emerging this time around may be considerably smaller than the old "Big Blue."

Call it the era of "Medium Blue."

IBM's revenue peaked at almost $107 billion in 2011, just before Rometty took over for Sam Palmisano. Since then, she's been shedding underperforming units like low-end servers, downsizing shrinking niches like systems integration and investing in hot areas such as cloud and security software and the Watson artificial intelligence effort. Rometty promised in February that revenue from these higher-growth areas would increase from $25 billion last year to $40 billion in 2018. But even so, the growth hasn't been able to offset all of the shrinking in older lines of business.

Such was the story again this week, as IBM reported yet another sad quarter. For the 14th consecutive quarter, sales declined -- at $19.3 billion it was IBM's lowest three-month revenue total since the first quarter of 2002. Wall Street was expecting $19.6 billion. The company also cut its per-share profit forecast for the rest of the year and sounded a little shaky about 2016, too. The stock plunged as much as 6% on Tuesday to $140.27, the lowest price in five years.

In an interview with Yahoo Finance, IBM CFO Martin Schroeter pointed out that the growth businesses increased 30% in the first nine months of the year -- a pace that's even ahead of what Rometty promised. "We're starting to see the results from our investments," he says. "We feel very good about the strategy."

The latest shortfalls have a lot to do with the stronger dollar, Schroeter added. The 14% third-quarter drop in revenue from a year earlier would have been only 1% if the dollar had held steady. But even accounting for currency fluctuations, revenue in all of IBM's traditional lines of business is still falling.

It's all well and good to cut back on weak businesses that don't play to IBM's current strengths, like low-end servers or disk-based network storage systems, but just how big will the new IBM that emerges someday end up being? Stifel Nicolaus analyst David Grossman asked Schroeter point blank on Monday's quarterly call: "Are you or the company thinking any differently about the scale of the overall business and the need to have as far-reaching a business as you've historically had?"

And Schroeter's answer was a not-quite straight ahead version of "yes." "We're not trying to be the largest of something," the CFO said. "What we are, though, is trying to be the highest value. "

Where does all of this leave Rometty? In her almost four years as CEO, her investments and divestments have proven right so far. And IBM has not attracted the sort of short-term activist hedge funds that have plagued some of Rometty's fellow tech CEOs like Meg Whitman at Hewlett-Packard (HPQ) or Joe Tucci at EMC (EMC). Instead, the ultimate long-term investor, Warren Buffett, remains a supporter, and one who happens to own 80 million shares of IBM stock.

Speaking at the Wall Street Journal’s global technology conference on Tuesday, Rometty showed no interest in changing her strategy. “I run this company for the long term,” she said. “We are going to keep investing," she added later in the interview.

But the short-term outlook remains challenging. "We have not given up hope that IBM can adapt to industry changes but continue to think it too soon to invest," UBS analyst Steven Milunovich wrote on Tuesday. It's a widely held view and one that probably won't change until Rometty has more to show from her investments.