IBM CEO defends bumpy financial ride as company strategy shifts

In a call with investors, Ginni Rometty vigorously defended IBM's pursuit of emerging high-growth markets

IBM CEO Ginni Rometty is moving quickly to quell concerns about the company's sinking earnings and defend a deal to pay more than a billion dollars to hand off its money-losing microelectronics business to GlobalFoundries.

In a conference call held Monday after IBM issued its earnings report, Rometty firmly asserted that the dip in earnings as well as the chip-business deal were necessary for the company to make bold moves to stay current in a tumultuous time of change in the IT industry.

"Make no mistakes, our results in this quarter were disappointing and we don't want to minimize that," she said. "But we have been very clear that this industry is shifting and we have been executing a strategy that moves this company to the future. We are reinventing and managing this company for the long term ... I absolutely convinced we are over the right targets."

IBM announced Monday that it was paying Global Foundries to take over its semiconductor manufacturing business.

Although it might seem shocking IBM would pay to get rid of a business unit that brings in US$7 billion in revenue, that money was "empty calories" for IBM, Rometty said. It produced little in the way of profit and, in fiscal 2013, actually lost approximately $700 million.

The move to hand off semiconductor manufacturing was more about strategy than specific yearly losses, she said. "When I think about revenue, I think about moving us first and foremost to higher value," Rometty said.

The semiconductor manufacturing business is one that requires large amount of capital, and will require even more in the future as wafer production grows more expensive and intricate. "That is someone else's business," Rometty said. The company has "no apologies for divesting anything that is not high value, not core. We need to deploy that capital to other things," Rometty said.

IBM will still continue to invest heavily in semiconductors -- it has pledged $3 billion in research in this area -- but will license out the technologies rather than build them in house.

Beyond the financial confusion stirred up by the GlobalFoundries deal, the third quarter financial results from the IBM, ending in September, showed the company struggling to increase its business overall.

Third-quarter net income for the company came to $3.5 billion, 17 percent lower than the $4.1 billion for the same quarter a year prior. Revenue slumped year-on-year as well, down 4 percent to $22.4 billion. Rometty attributed these numbers to a temporary but significant slowdown in client buying behavior.

The IT industry is going through "unprecedented change," with the enterprise adoption of cloud and mobile technologies, social media, data and analysis, and a greater emphasis on security, Rometty said.

These are the potential areas of high-value growth (and high profit margin) for the company.

"These will reorder the industry and therefore we have to reinvent ourselves ... around these things," Rometty said.

Rometty pointed out the many initiatives IBM has thrown itself into to pursue the emerging markets.

This year alone the company started a business practice around its Watson cognitive computing service, is plowing $1.2 billion into its cloud data centers and another $1 billion into ramping up Bluemix cloud software platform.

It has also set off on a new wave of partnerships with the likes of Apple and SAP, which point the way to IBM "being the go-to for entering the enterprise business," Rometty said.

One analyst on the call wondered if new businesses and startups are becoming more accustomed to use other, newer services for these duties, rather than trusting IBM. Rometty disagreed with this assessment, pointing out that there are many startups using IBM's Softlayer infrastructure services and that the Watson platform has thus far attracted the attention of over 3,000 partners.

More importantly, she noted, IBM's overall goal is to be the business that enterprises go to in order to incorporate these new technologies into their operations. While there are many innovative startups, enterprises still need a way to integrate new technologies into their overall infrastructure, a role IBM is uniquely suited to help with.

When approaching the cloud, enterprises are now moving into hybrid operations, in which some jobs, especially those that need to be stood up quickly, are run in the cloud, while systems-of-record will continue to be run in-house.

"We are seeing that play out. That is what people are looking for," Rometty said. In this scenario, IBM will work to be a "navigator," to help enterprises build hybrid systems.

The results are starting to pay off, Rometty assured the analysts, and touted some metrics in this regard.

Big data and analytics brought in $16 billion in revenue fiscal 2013, and that business is growing at 8 percent this year to date. Cloud technology has grown 50 percent year to date. Cloud services brought in $4.4 billion in 2013 and have shown a 50 percent growth rate this year to date. Social, mobile and security products and services are also showing significant growth rates, she said.

"They are within themselves very large businesses with high growth rates," Rometty said.

(IDG News Service reporter Mikael Ricknäs contributed to this report.

Copyright © 2014 IDG Communications, Inc.

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