IBM to Spin Off Managed Infrastructure Services Unit -- 2nd Update
October 08 2020 - 12:15PM
Dow Jones News
By Dave Sebastian and Asa Fitch
International Business Machines Corp. plans to spin off its unit
that manages clients' information-technology infrastructure and
accounts for nearly a quarter of its sales and staff, a major step
in the 109-year-old tech pioneer's effort to focus on the
faster-growing cloud-computing business and artificial
intelligence.
The move IBM announced Thursday would separate a large chunk of
its broader IT services business, which for years has been its
biggest revenue driver. But the business has shrunk as customers
have embraced cloud computing and has become an earnings drag for
Big Blue.
Executives said on a conference call that the
managed-infrastructure-services unit had about $19 billion in sales
over the past year, adding that the new company formed would have
about 90,000 employees and a backlog of $60 billion. IBM reported
$77.15 billion in total revenue for 2019 and 352,600 total
employees.
Investors welcomed the news, sending IBM's shares up more than
7% in Thursday trading. The stock had been down 7% this year
through Wednesday's close, lagging cloud rivals that have seen big
gains during the pandemic with companies shifting more work online.
Microsoft Corp. shares are up more than 30% and shares in online
retailer Amazon.com Inc., the largest cloud-services provider, are
up more than 70%.
The spinoff announcement comes a few months after the Armonk,
N.Y., company said it was cutting an unspecified number of jobs in
the first major workforce reduction under Chief Executive Arvind
Krishna. He assumed the role in April and is trying to revive
growth at the tech company. The layoffs were made against the
backdrop of the Covid-19 pandemic, which has caused many IBM
customers to dial back investments and hold off on big software
deals.
Even before the health crisis, IBM has been struggling through a
yearslong effort to reposition the company. Sales have fallen
around 25% in the past eight years, and the company trails the
likes of Amazon.com and Microsoft in cloud computing -- where
companies rent rather than buy computing horsepower.
IBM signaled its focus on the cloud with the appointment of Mr.
Krishna as CEO after his predecessor Ginni Rometty -- now executive
chairman -- struggled to inject growth. Mr. Krishna ran the
company's cloud and cognitive-software division. IBM also named Jim
Whitehurst -- CEO of Red Hat, the open-source software giant that
IBM acquired for about $33 billion last year -- as its president,
the first time in decades it has given an executive that singular
title.
IBM has been trying to capitalize on what it calls the hybrid
cloud, which companies use to manage software and other systems
across different cloud services and their own data centers. IBM saw
the deal for Red Hat, which was the most expensive in its history,
as an opportunity to gain on competitors in cloud computing.
The technology-services division that encompasses the unit to be
spun off has been a headache for IBM for a while. Sales in the
entire services division fell 6.1% last year, though it remained
IBM's largest by revenue at roughly $27.4 billion -- or about 35%
of the company's total.
In April the company recorded a $900 million charge against
earnings, largely to cover restructuring costs linked to the
services division. The company in January had signaled it was
planning changes at the unit to bolster its competitiveness.
IBM said Thursday the yet-to-be-named company already has
relationships with 4,600 clients in 115 countries and operates in
what it sees as a $500 billion market. The new company would be
able to partner across all cloud vendors, providing the opportunity
for stronger profits and cash generation, IBM said. The separation
is expected to be completed by the end of 2021.
In connection with its plans Mr. Krishna said IBM expects to
record $2.3 billion in accounting charges by the end of the
year.
The company Thursday also reported third-quarter profit and
revenue that were roughly in line with Wall Street's expectations.
For the September-ended quarter, IBM posted preliminary earnings
from continuing operations of $1.89 a share, or $2.58 a share on an
adjusted basis, on revenue of $17.6 billion. The company said it
would release its full quarterly report later this month.
Write to Dave Sebastian at dave.sebastian@wsj.com and Asa Fitch
at asa.fitch@wsj.com
(END) Dow Jones Newswires
October 08, 2020 12:00 ET (16:00 GMT)
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