IBM released its 2013 annual report over the weekend and with it, company CEO Ginni Rometty outlined the company’s strategy going forward highlighting three strategic areas Big Blue will focus on for growth: data, cloud and systems of engagement.
In a speech at IBM’s PartnerWorld Leadership Conference in Las Vegas last month, Rometty identified the three trends transforming the IT industry today as data, cloud and engagement. In a letter to shareholders included with the annual report, Rometty describe how the company plans to drive growth and profit through three key initiatives: Transforming industries and professions with data, remaking enterprise IT for the cloud and building systems of engagement leveraging enterprise security and data.
Rometty offered several examples of how IBM is poised to exploit these trends to remain a key player in the industry. However, to achieve its growth goals, IBM must focus on higher-value opportunities. This is expected to generate sufficient profit and cash to enable IBM to invest in future sources of growth and provide strong returns to shareholders, and to achieve the company’s 2015 operating earnings per share (EPS) target of $20.
In 2013 IBM invested $3.1 billion for 10 acquisitions, $3.8 billion in net capital expenditures and $6.2 billion in R&D.
“While making all these investments in IBM’s future capabilities, we were able to return $17.9 billion to you in 2013—approximately $13.9 billion through gross share repurchases and $4.1 billion through dividends,” Rometty said. “Last year’s dividend increase was 12 percent, marking the 18th year in a row in which we have raised our dividend, and the 98th consecutive year in which we have paid one.”
Yet, “while we continue to remix to higher value, we must also address those parts of our business that are holding us back,” Rometty said. “We have two specific challenges, and we are taking steps to address both.”
The first, she said, involves shifting the IBM hardware business for new realities and opportunities.
“We are accelerating the move of our Systems product portfolio—in particular, Power and storage—to growth opportunities and to Linux, following the lead of our successful mainframe business,” Rometty said. “The modern demands of big data, cloud and mobile require enterprise strength computing, and no other company can match IBM’s ongoing capabilities and commitment to developing those essential technologies. We also announced, in January, an agreement to sell much of our Intel-based x86 server business to Lenovo. This divestiture is consistent with our continuing strategy of exiting lower margin businesses, such as PCs, hard-disk drives and retail store solutions. But let me be clear—we are not exiting hardware.”
Moreover, she emphasized that IBM will remain a leader in high-performance and high-end systems, storage and cognitive computing, and will continue to invest in R&D for advanced semiconductor technology.
Meanwhile, “the second challenge involves the world’s growth markets. While IBM’s growth in Latin America and Middle East and Africa was strong, enterprise spending slowed in other key growth markets,” she said. “We are intensifying focus on new growth opportunities. Overall, the opportunity in the world’s growth markets remains attractive.”
IBM Focuses on Big Data, Cloud, Engagement in 2014
In recent quarters, IBM’s revenue from growth markets has been down. For the fourth quarter of 2013, revenues from the company’s growth markets decreased 9 percent; specifically revenues in the BRIC countries — Brazil, Russia, India and China — decreased 14 percent.
“From a geographic perspective, performance in growth markets was mixed, though disappointing overall,” said Martin Schroeter, IBM’s senior vice president and CFO of Finance and Enterprise Transformation, during a call with analysts to report the fourth-quarter earnings. “Looking at our two largest regions, Asia Pacific was down, primarily driven by China, while again we had good performance in Latin America.”
And with its new focus on three strategic initiatives, IBM is aiming to see things turn around. In an interview with eWEEK, Bob Picciano, senior vice president of IBM’s Big Data and Analytics Group, said, “Ginni organized the company, specifically the Software Group, around those transformative tenets. And basically set the rest of the company as ecosystems around those bases.”
In her letter, Rometty called data a natural resource. “In its exponentially increasing volume, velocity and variety, data is becoming a new natural resource,” she said. “It promises to be for the 21st century what steam power was for the 18th, electricity for the 19th and hydrocarbons for the 20th. This is what we mean by enterprises, institutions and our planet becoming smarter.”
She noted that the market for data and analytics is estimated at $187 billion by 2015. “To capture this growth potential, we have built the world’s broadest and deepest capabilities in big data and analytics—both technology and expertise,” she said. “We have invested more than $24 billion, including $17 billion of gross spend on more than 30 acquisitions. We have 15,000 consultants and 400 mathematicians. Two-thirds of IBM Research’s work is now devoted to data, analytics and cognitive computing. IBM has earned 4,000 analytics patents. We have an ecosystem of 6,000 industry partners and 1,000 university partnerships around the world developing new, analytics-related curricula.”
The company’s data and analytics portfolio includes decision management, content analytics, planning and forecasting, discovery and exploration, business intelligence, predictive analytics, data and content management, stream computing, data warehousing, information integration and governance, Rometty said. It also sets the foundation for IBM’s foray into cognitive computing, which resulted in the Watson cognitive system.
In January, IBM announced a $1 billion investment to create the IBM Watson Group, to accelerate the era of cognitive systems and extend IBM’s position in the big data space. IBM officials said the new group, headquartered in New York City’s Silicon Alley, is the most significant new stand-alone unit since IBM used the same approach to establish the global PC standard.
“Traditional computing systems, which only do what they are programmed to do, simply cannot keep up with big data in constant motion,” Rometty said. “For that, we need a new paradigm. These new systems are not programmed; rather, they learn, from the vast quantities of information they ingest, from their own experiences, and from their interactions with people.”
IBM Focuses on Big Data, Cloud, Engagement in 2014
IBM’s investments in data and analytics are driving significant growth, with 40,000 service engagements to date, growing by double digits, she added. In 2013 the company’s business analytics revenue rose 9 percent—led by Global Business Services and Software. “This is already a nearly $16 billion business for us, and we have raised our expectations for it,” she said. “This is creating a market that is expected to reach $250 billion by 2015.”
Meanwhile, Rometty claimed IBM to be “the leader in enterprise cloud, a position we have enhanced through investments of $7 billion on 15 acquisitions, most notably SoftLayer in 2013. We provide the full spectrum of cloud delivery models—infrastructure as a service, platform as a service, software as a service and business process as a service. IBM’s cloud capabilities are built on 1,500 cloud patents and supported by thousands of cloud experts. Eighty percent of Fortune 500 companies use IBM’s cloud capabilities.”
IBM’s cloud foundation at the infrastructure level is SoftLayer, which Rometty said is “the market’s premier public and private cloud environment, with ‘bare metal’ dedicated servers that provide unmatched compute power, deployed in real time, with hundreds of configuration options. Our public cloud processes 5.5 million client transactions every day.”
The company boasts a roster of 30,000 cloud client engagements, with customers such as Honda, Sun Life Stadium, US Open Tennis and hundreds of top online games with a user base exceeding 100 million.
“To meet growing demand for greater speed, and legal requirements for compliance and data residency, IBM is aggressively expanding its global cloud footprint,” Rometty said. “We currently have 25 data centers globally, and the new $1.2 billion investment announced in January will see the opening of 15 more, in the U.S., the UK, Australia, Brazil, Canada, China, France, Germany, India, Japan, and Mexico.”
In addition, at the recent IBM Pulse 2014 conference, IBM announced another $1 billion investment to launch a Platform-as-a-Service capability for developing born-on-the-cloud apps and connecting existing enterprise data and applications to the cloud.
“The impact of our cloud investments shows up clearly in our results,” Rometty said. “IBM’s cloud business grew 69 percent in 2013, delivering $4.4 billion of revenue. As we actively embrace cloud in order to deliver ‘IBM as a Service’ to our clients, we expect to see significant benefits in client experience, revenue growth and enterprise productivity.”
Finally, regarding systems engagement, Rometty said, “complementing traditional back-office systems of record, enterprises are now taking a systematic approach to engagement with all of their constituencies—customers, employees, partners, investors and citizens. Indeed, 57 percent of companies now expect to devote more than a quarter of their IT spending to these new systems of engagement by 2016, nearly twice the level of 12 months ago.”
Social business and data analytics are helping to enable systems of engagement. IBM is building modern enterprise systems of engagement and learning. The company’s social platform, Connections, has 300,000 IBM users and 200,000 communities, Rometty said. There are more than 30,000 IBMers active on Client Collaboration Hubs for the company’s top 300 accounts. In 2013, IBM achieved year-over-year growth of 69 percent in mobile, 19 percent in security and 45 percent in social business.