Big Blue promises Big Bucks from Big Bets

IBM CEO Rometty's letter to investors says the turnaround plan is working

IBM chief executive officer Virginia M. Rometty has released her annual Chairman's Letter and has told investors that IBM “knew we faced a critical year of transformation” in 2014 but has “made significant progress and built momentum” to get itself out of a nasty slump that has seen sales decline for eleven consecutive quarters.

Rometty's riposte to that ragged ride is an insistence that Big Blue is making the right big bets to bring in big bucks, in the form of billion-dollar spends on Watson, SoftLayer and Bluemix.

“Our analytics business grew 7 percent to $17 billion in 2014,” she writes, while cloud grew “... 60 percent to $7 billion in 2014, with 'as-a-service' at $3 billion, up nearly 80 percent and exiting the year with a run rate of $3.5 billion.”

This excerpt from the letter might just be the money shot:

Together, cloud, analytics, mobile, social and security generated $25 billion of revenue in 2014, growing by 16 percent. Five years ago, these businesses represented just 13 percent of our revenue. Today, that has risen to 27 percent of IBM’s revenue.

The letter also points out that the company's current strategic initiatives generated $25bn last year, and are growing at a rate that outpaces other market segments.

Another data point mentioned in the letter worth noting is that IBM has “a services backlog of $128 billion.” And that backlog looks like it will become higher-margin because Rometty also says “In services, we will deploy advanced automation to delivery.”

There's also a pledge to “shift an additional $4 billion of spending to data, cloud and engagement this year, aimed at deepening our differentiation in the marketplace” and a promise to “continue to bring innovation to our core franchises”.

There's no doubt that IBM faces secular challenges in addition to its particular problems. Yet Rometty's letter points out that “In 2014 we marked our 19th consecutive year of raising our dividend and our 99th year of paying one.”

Few companies have ever matched either feat.

Which is the kind of thing the letter is supposed to get you thinking. Indeed there's a concluding section about how IBM is “an essential company.”

Of course no business is truly essential, unless the market keeps finding reasons to do business with it. If Rometty's next letter can point to IBM's new products continuing to climb, perhaps IBM will have successfully reinvented itself again. And if not, by next March we'll have hints about how Symantec's and HP's splits worked out. ®

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