At IBM’s Investor’s Day meeting on Thursday, IBM CEO Ginni Rometty laid out a new strategic goal for the company, after failing to meet the last one set by her predecessor, Sam Palmisano.
She is shifting $US4 billion to spend on four fast-growing markets: cloud, big data/analytics, enterprise mobile/social, computer security. She has promised to grow these businesses from $US25 billion in revenue last year (27% of of the company’s revenue) to $US40 billion in combined annual revenue by 2018, or a promised 40% of the company’s expected total revenue by then.
And the $US4 billion doesn’t include acquisitions.
“We will acquire what we need. We continue to be acquisitive,” Rometty says. “What we buy is going to complement the areas we’ve chosen to be in.”
Schroeter also added that IBM has no size limit on the kind of acquisition it will make.
Years ago, Palmisano had promised to grow IBM’s profits to $US20 earnings per share by 2015.
Then the market sands shifted out from IBM’s feet and IBM’s revenue started shrinking and fast. IBM went into cost-cutting mode, selling off low-performing business, laying off thousands of workers, spending billions upon billions on stock buybacks to reduce the numbers of shares in circulation and hit that $US20/share target. It didn’t work and earlier this year she told investors that IBM wouldn’t make that target. She revised the 2015 EPS target to $US15.75 to $US16.50.
“We are engineering a downtown,” explained CFO Martin Schroeter. IBM also on Thursday said it expects to take a bigger hit on the foreign exchange rate, trimming profits by more than 6 points, above previous projections of 5-6 points.
Rometty didn’t neglect investment altogether during that cost-cutting time. She spent a little over $US3 billion on cloud initiatives including turning Watson into a cloud business, building out cloud data centres worldwide and launching a software-app hosting cloud called Bluemix. She also dedicated $US3 billion to R&D to create a next-gen semiconductor. More recently, she dedicated another $US1 billion to get into the a hot young market called software-defined storage, which threatens storage market leader EMC.
Still, all of the businesses that IBM owned became shrinking dinosaurs as enterprises started using cloud computing more, renting their apps hosted elsewhere on a subscription “pay-for-use” basis, instead of buying everything and installing it in their own data centres.
Faster, cheaper computing power and storage also led to new kinds of tech like “big data.” Every company can now afford to do this kind of business analysis, not just the biggest ones with the biggest IT budgets.
IBM wasn’t late to cloud. It’s been competing with Amazon years before Google jumped in. And it certainly wasn’t late to analytics. IBM was one of the leaders in selling that tech the old fashioned way: as expensive software and computer systems.
Still, it’s bread-and-butter businesses were shrinking faster than it could grow the new markets. Revenue declined 6% to $US92.8 billion in 2014 and IBM has said it doesn’t expect total revenue to grow in 2015. As companies rent more tech, they don’t buy as many expensive computer servers, storage, software and they don’t need consulting services to install it all.
Interestingly, Schroeter explained that much of the $US4 billion will come from cost savings from IBM using these new technologies internally.
“The things we do for clients with analytics, we do ourselves. We’re using Watson on first-level support. We don’t just see 3% savings, we see 80% savings. Now, you only see it on small part of the business, but it freed up spending. Instead of returning it to profits, we choose reinvest a big part of it.”