International Business Machines (IBM) bets that cognition is the ignition for growth. The company, the world's top provider of computer products and services, is increasingly investing in its cognitive computing system, Watson. The artificial intelligence system helps customers in a wide range of business analyze massive amounts of data to make better decisions. The company's information technology, business services, and software units are now among the largest in the world. While it has moved from hardware to a large degree, the company maintains industry-leading enterprise server and data storage products lines. IBM is transforming its operations as it deals with a rapidly changing technology environment.
IBM manages its sprawling operations in five segments. Global Technology Services and Global Business Services (together called Global Services) account for nearly 61% of revenue and include a full range of enterprise IT and business consulting offerings. Software (primarily middleware and operating systems software) generates about 28% of sales, with Systems Hardware (advanced computer power and storage products) and Global Financing bringing in about 10% and 2%, respectively.
The international in IBM has become increasingly important to its bottom line. With clients in about 175 countries, overseas sales account for 63% of revenues. The US accounts for 37% of its total revenues, while Japan represents about 9%.
Sales and Marketing
IBM operates country-based units where consultants, product specialists, and others (to a large degree hired locally), facilitate the adoption and fulfillment of its products and services. Among its major markets are Canada, France, Germany, Italy, Japan, the US, and the UK. The company also targets Austria, the Bahamas, Belgium, the Caribbean, Cyprus, Denmark, Finland, Greece, Iceland, Ireland, Israel, Malta, the Netherlands, Norway, Portugal, Spain, Sweden, and Switzerland. It serves clients across most industries; leading industry groups include financial services, industrial, and communications.
As the company works to reposition itself to capitalize on data, analytics, and cloud computing (all parts of its cognitive initiatives), among other areas, its revenue has dropped for four consecutive years.
In 2015 sales were off 12% from 2014, falling to $81.7 billion from $92.8 billion. Revenue slipped in all of its segments. Its two biggest businesses, Global Technology Services and Global Business Services, posted the biggest drops, 10% and 12%, respectively.
The company saw a boost in profit in 2015, posting net income of $13.7 billion, 10% higher than 2014. A lower loss on discontinued operations in 2015 from 2014 helped increase the profit.
Cash flow from operations improved a hair to $17 billion in 2015 from $16.9 billion in 2014.
IBM is trying to bridge its operations from the days of high margin hardware and long-term service contracts to the lower margin model of selling subscription-based use of software stored in the cloud. The company has developed a broad strategy around the key trends of big data and analytics, cloud computing, and social/mobile. It sees these areas as major growth opportunities and brings to bear both homegrown initiatives and acquisitions to cultivate them.
A key element in IBM's plans is its Watson cognitive computing system, which can assimilate complex information and deliver answers to questions across a range of industries. It is one of the initiatives in which IBM will invest $4 billion over the next few years. Besides the Watson group, the company has established Watson units focused on health and the internet of things. IBM has made Watson more widely available through a series of application programming interfaces for a number of uses.
IBM has arranged partnerships with companies like Apple, Cisco Systems, and Twitter to combine on data collection and analysis. The Watson Health group has partnered with health and medical institutions and companies to collect, analyze, and find patterns in health-related data from cancer to exercise. Partners include Memorial Sloan-Kettering, the American Heart Association, Under Armour, Novo Nordisk, and Teva Pharmaceuticals.
The company also is investing in cloud computing. It trying to compete with Amazon, Google (a unit of Alphabet), and Microsoft in offering cloud-based computing services, Its owns businesses such as Watson are delivered from the cloud. The company focuses on hybrid cloud, the mixture of keeping data on IBM computers and the customer's own systems.
In addition, IBM is focused on emerging markets where the populations and companies that serve them are embracing mobile, social, cloud, and big data at faster rates, in some cases, than mature countries.
Mergers and Acquisitions
IBM continues to use an aggressive acquisition strategy to augment its own R&D as it expands and refines its mix of business software and IT services. Many of the acquisitions have been made to provide data and services for the Watson system. IBM has earmarked $100 million to acquire startups that could expand Watson's capabilities.
Perhaps the most notable of those Watson-related acquisitions was that of the Weather Company in 2016. IBM bought the company's business-to-business, mobile and cloud-based web-properties, weather.com, Weather Underground, The Weather Company brand and WSI, its global business-to-business brand. The transaction did not include the Weather Channel, but it licenses weather forecast data and analytics from IBM under a long-term contract. The deal provides a wealth of data for processing through Watson to help companies make better decisions that are affected by the weather.