IBM Pumps $4 Billion Into Cloud and Mobile Initiatives
Tech company shifts spending plans to target faster-growing segments
IBM also said Thursday that it anticipates a bigger impact from the stronger dollar than previously forecast. PHOTO: MARK LENNIHAN/ASSOCIATED PRESS
International Business Machines Corp. is in the same bind as many of its corporate-tech peers: how to foster fast-growing but unproven initiatives while lucrative older businesses are slowing down. Having identified a set of promising new directions, the company plans to invest more in them.
At an annual meeting with analysts Thursday, the company said it will shift $4 billion in 2015 spending to what it calls the “strategic imperatives” of cloud, analytics, mobile, social and security technologies.
The spending plan, in turn, has prompted IBM Chief Executive Virginia Rometty to set a new financial target for those faster-growth segments: $40 billion in combined annual revenue by 2018, or more than 40% of the company’s expected total revenue.
It is an ambitious goal. Those businesses generated $25 billion in revenue last year, or 27% of total revenue, though the trend line has been rising for both figures.
“We did an awful lot last year,” Ms. Rometty said in an interview before the meeting. “We’ve reinvented this company one more time.”
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But more needs to be done to counteract declines in other IBM businesses. The company said in January that total revenue from continuing operations declined 6% to $92.8 billion in 2014 and projected that total revenue wouldn’t grow in 2015.
The company also has run into a stiff headwind from the rising value of the dollar, which hurts IBM’s income statement when sales made abroad are converted into U.S. currency. IBM, while reaffirming its 2015 outlook, on Thursday boosted its estimate for foreign-exchange rates on its revenue growth. A rise in the value of the dollar versus foreign currencies has reduced the value of revenue IBM takes in abroad and converts to U.S. currency.
For its current quarter, IBM now expects currency to hurt revenue growth by more than 7 percentage points, above the hit of 6 to 7 points it projected in January. For the full year, IBM is expecting a foreign-exchange impact of more than 6 points, above previous projections for an impact of 5 to 6 points.
On Thursday, Ms. Rometty described the currency difficulties the company is facing as among the most extensive in recent memory.
The company in 2014 completed the sale to Lenovo Group Ltd. of its System X business in commodity-style servers; it had previously sold its personal-computer business to the Chinese company. IBM said Thursday that it continues to expect a 4-percentage-point impact to revenue growth in each of the first three quarters of 2015 because of the System X divestiture.
Shares in IBM fell 1.2% to $160.87 on the New York Stock Exchange.
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Last October, IBM abandoned what turned out to be an overly ambitious long-term target of $20 a share in operating earnings by 2015. In January, it reported $16.53 a share for 2014. It also set a less-specific long-term goal of delivering “low single-digit” percentage growth in revenue and “high single-digit” growth in operating earnings per share.
Based on recent investments and divestitures, Ms. Rometty said before the meeting that she has “great confidence that we can and will achieve the long-term model we put out.”
IBM businesses that have posted lower revenue lately include some classes of technology services and software as well as IBM’s remaining lines of big computers. Besides the System X business, IBM last year also divested itself of its semiconductor-manufacturing business, agreeing to pay Globalfoundries Inc. $1.5 billion to take over the chip operations.
Hardware now accounts for less than 10% of IBM’s total revenue, Ms. Rometty said. The changes have dispensed with businesses that were a drag on earnings, she added.
Among its new priorities, IBM has put particular emphasis on online, or cloud, services. It has said it invested $1.2 billion in data centers to augment those it acquired with SoftLayer Technologies in 2013. It also invested $1 billion to accelerate commercialization of its Watson data-analytics technology.
IBM’s plan to invest $4 billion more on strategic initiatives won’t necessarily require spending cuts in other businesses, Ms. Rometty said. In many cases, she said, the company can take advantage of money freed up by operating at higher efficiency.
The company has taken charges for “rebalancing” its workforce—laying off some workers while hiring others with new skills—but doesn’t expect to reduce overall head count.
“It’s not a cost-cutting exercise,” Ms. Rometty said of the company’s actions. “It’s a very healthy remix.”
Presenters at the analyst meeting in New York, besides Ms. Rometty, included IBM’s chief financial officer, Martin Schroeter, cloud chief Robert LeBlanc and senior vice presidents John Kelly and Steven Mills.
