In The Midst Of An Epic Transformation, IBM Lands A Huge $US500 Million Cloud-Computing Deal

Ginni RomettyPaul Morigi/Getty ImagesIBM CEO Ginni Rometty

IBM is in the middle of a huge transformation and will issue a progress report — its quarterly results — after the market closes on Wednesday.

It will go into that call with analysts with a piece of good news: A new, $US500 million cloud computing contract.

That’s nice news compared to some of the challenges IBM has had in the past few months.

IBM sold one of its computer server businesses to Lenovo and said it is investigating other divestitures.

It began shedding employees from its global workforce, too, as it did last year. IBM hasn’t said how many jobs it is cutting, but did say it plans to spend $US1 billion on 2014’s cuts, “plus or minus $US100 million,” (the same as it spent in 2013), and confirmed that layoffs took place in the first quarter. One analyst estimated that IBM would shed “at least 13,000 heads” worldwide. At the end of 2012 it employed 434,246 people.

CEO Ginni Rometty stepped up IBM’s efforts in cloud computing. She vowed to spend over $US3 billion to add more cloud services, including creating a cloud based on IBM’s natural speech supercomputer, Watson. All told, IBM has spent $US7 billion since 2007 beefing up its cloud, it says.

That’s because enterprises are undergoing a major shift from buying all their tech to renting cloud services, and IBM has felt that shift — and it wants to dominate in this area. Its 2013 was soft, with revenue of $US99.8 billion, down about 5%, so Rometty and her top execs chose not to take their 2013 cash bonuses.

Against that as a backdrop, it announced the new contract, a huge six-year $US500 million deal with insurance company The Hartford to install what’s known as a “private cloud.” That’s when a company remakes its own data center to be faster and more efficient than using third-party cloud tech. It differs from typical cloud-computing contracts, in which companies rent software and computers within someone else’s data center and access them over a network connection.

This is an especially nice feather for IBM given its public battle to win a $US600 million private cloud deal with the CIA against Amazon last year. Ultimately, the CIA chose Amazon.

It will also help IBM convince investors that it’s on the right track when expectations are modest for IBM’s results.

Analysts expect revenue to dip about 2% from the same period a year earlier, to $US22.9 billion. They expect earnings per share to drop 15% to $US2.54, thanks to the anticipated charges from job cuts.

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