International Business Machines (IBM) bets that cognition is the ignition for growth. The company is investing in it what is calls cognitive computing systems, led by the Watson artificial intelligence platform, that help customers analyze massive amounts of data to make better decisions. Among other areas the company is betting on for growth are analytics, artificial intelligence, security, cloud, blockchain, and quantum computing. IBM's information technology, business services, and software units are among the largest in the world. While IBM has placed less emphasis on hardware, the company maintains enterprise server and data storage product lines that are among industry leaders.
IBM manages its sprawling operations in five segments.
Technology Services and Cloud Platforms, which generates about 45% of revenue, provides cloud, outsourcing, and other managed services focused on clients’ enterprise IT infrastructure. Offerings include maintenance for IBM products and other technology platforms, as well as support.
Cognitive Solutions, which provides about a quarter of revenue, includes Watson, IBM’s cognitive computing project. Major Watson initiatives are Watson Platform, Watson Health, Watson Weather & Media, and Watson Internet of Things. Another part of the unit is the company’s security platform, which provides detection and protection against cyber threats across a customer’s operations.
Global Business Services, about 20% of revenue, provides consulting, application management services, and global process services to help customers move their businesses to digital platforms.
Systems, about 10% of revenue, is IBM’s hardware business, providing technologies for hybrid cloud and cognitive workloads. The unit sells servers, storage systems, and operating systems software. The segment also designs semiconductor and systems technology in collaboration with IBM Research.
Global Financing provides credit for customers to buy IBM products. It also handles used equipment returned from leases, as well as other used and surplus equipment. The unit accounts for about 2% of revenue.
IBM has clients in about 175 countries, with sales outside the US accounting for more than 45% of revenue. Customers in Europe, the Middle East, and Africa (EMEA) generate about 30% of sales and those in Asia/Pacific supply about 20% of sales.
Sales and Marketing
IBM operates country-based units where consultants, product specialists, and other workers, facilitate the adoption and fulfillment of its products and services. It serves clients across most industries; leading industry groups include financial services, industrial, and communications.
Since IBM posted its highest revenue of nearly $107 billion in 2011, the company’s revenue has tumbled nearly $31 million as its older products faded from favor or were sold off. Net income, while also losing ground, stayed above the $10 billion mark before sliding lower in the past two years.
In 2018, IBM halted the revenue slide, reporting a less-than-1% sales increase to $79.6 billion from 2017. It was the first time in six years that sales beat the previous year’s results. None of the company’s business segments turned in robust growth in 2018, although cloud revenue of $19 billion was 23% higher year-to-year. Systems segment sales weakened, dropping 2%, which IBM blamed on comparison to a strong performance the previous year and price pressure on storage systems.
Geographically, sales in the Europe, the Middle, East, and Africa region rose about 5%, while the Asia/Pacific region’s sales were flat, and the America’s sales slipped about 2% in 2018 from 2017.
Net income jumped more than 50% to $8.7 billion in 2018 from $5.7 billion in 2017 due lower year-to-year tax charges related to the US Tax Cuts and Jobs Act of 2017.
IBM had cash and equivalents of $11.6 billion in 2018, down about $600 million from the year before. In 2018, the company’s operations generated $15.2 billion in cash, while investing activities and financing activities used $4.9 billion and $10.4 billion, respectively.
IBM thinks its investments in cognitive computing, cloud, security, big data, and analytics are beginning to pay off. IBM reported that its newer offerings accounted more than 50% of 2018 revenue, compared to 25% four years ago.
IBM also is investing in emerging technologies such as blockchain and those in earlier stages of research such as quantum computing. As the perennial leader (26 straight years) in the number of US patents granted, IBM maintains a steady pipeline of potential products.
In cloud computing, the company competes with Amazon, Microsoft, and Google, which have built up strong leads. IBM focuses on hybrid cloud, the mixture of keeping data on IBM computers and the customer's own systems.
The proposed acquisition of Red Hat (for about $34 billion) is to turbocharge IBM's hybrid cloud business. IBM intends to offer customers a path to cloud environments in a way that's not dependent on hardware, but on Red Hat's open source software, which should be less costly and time-consuming. The deal was expected to close in late 2019.
IBM strives to move its offerings to higher margin products and services as it sells those with lower margins, even if it reduces overall revenue. In 2018, the company sold collaboration, marketing, and commerce software assets to HCL Technologies for $1.8 billion. IBM in 2019 said it would sell the Seterus mortgage servicing platform business. In another 2019 divestment, IBM agreed to sell marketing platform and commerce software products to Centerbridge Partners, an investment firm. Centerbridge intends to create a standalone company from the software assets.
Mergers and Acquisitions
IBM began a major acquisition to charge up its cloud computing capabilities in agreeing to buy Red Hat for about $34 billion, one of the biggest software acquisitions in history. The deal would bring Red Hat's open source software to IBM's cloud efforts; Red Hat would become a distinct unit in IBM's hybrid cloud division. The deal was expected to close in 2019.
In 2018 IBM acquired Armanta, a provider of aggregation and analytics software to financial services firms. The acquisition allows IBM to customers further integrate their risk management practices with other front or back office functions.
In another 2018 deal, IBM bought Oniqua Holdings, a provider of maintenance, repair, and operations (MRO) services for the mining, oil and gas, transportation, utilities, manufacturing, and other asset-intensive industries. With the Oniqua products, IBM can offer MRO services that connect with data to help users forecast equipment failures, optimize spare parts, and reduce unplanned downtime.
In 1914 National Cash Register's star salesman, Thomas Watson, left to rescue the flagging Computing-Tabulating-Recording (C-T-R) Company, the pioneer in US punch card processing that had been incorporated in 1911. Watson aggressively marketed C-T-R's tabulators, supplying them to the US government during WWI and tripling company revenues to almost $15 million by 1920. The company became International Business Machines (IBM) in 1924 and soon dominated the global market for tabulators, time clocks, and electric typewriters. It was the US's largest office machine maker by 1940.
IBM perfected electromechanical calculation (the Harvard Mark I, 1944) but initially dismissed the potential of computers. When Remington Rand's UNIVAC computer (1951) began replacing IBM machines, IBM quickly responded. The company unveiled its first computer in 1952. With its superior research and development and marketing, IBM built a market share near 80% in the 1960s and 1970s.
In 1993 CEO John Akers was replaced by Louis Gerstner, the first outsider to run IBM. He began to turn the ailing, antiquated company around by slashing costs and nonstrategic divisions, cutting the workforce, shaking up entrenched management, and pushing services. In 1994, Big Blue reported its first profit in four years. It also began making computer chips that year.
Since then, IBM has tried to keep ahead of its aging product lineup. It introduced the Watson artificial intelligence platform (named after Thomas Watson) in 2011 (as a contest on special episodes of Jeopardy!) as part of its renewal program that took it into cloud computing, cybersecurity, blockchain, and, it hopes, someday into quantum computing.
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