By Steven Rosenbush
International Business Machine Corp.'s acquisition of software company Red Hat last year helps underpin the technology and economics behind IBM's decision to restructure.
IBM on Thursday said it would spin off a unit that manages clients' IT infrastructure and accounts for nearly a quarter of its sales and staff. The more focused IBM that emerges will concentrate on cloud computing and artificial intelligence, helping customers modernize tech infrastructure such as private data centers.
Specifically, IBM will focus on providing a platform for companies that lease online software and computing capabilities from multiple cloud-computing providers.
"Red Hat gave us the confidence to do all of this," IBM Chief Executive Arvind Krishna told The Wall Street Journal.
IBM had $77.15 billion in revenue in 2019. It is spinning off operations that generated about $19 billion in sales over the past year, and that have about 90,000 employees and a backlog of $60 billion.
Mr. Krishna said there is plenty of room for growth and that the long-term winners in AI and the cloud are still to be determined. "We are only 20 to 25 percent of our way into the cloud journey. We are only 4 percent of the way into the AI journey," Mr. Krishna said.
"Refocusing IBM on fast-growing and emerging technologies will make them a better partner for companies like ours as we look to further innovate with data and AI," said Edward Wagoner, chief information officer for digital at commercial real estate services company Jones Lang LaSalle Inc. The move to remote work is accelerating the shift to the cloud, Mr. Wagoner said.
IBM has gone through a series of restructurings and realignments over the years. This year, its stock was down 7% through Wednesday's close, while rival cloud companies saw big gains as companies shifted to remote work during the pandemic. On Thursday, IBM shares rose 6%.
Red Hat, which IBM bought for about $33 billion, is key to what Mr. Krishna called the latest enduring platform in the company's 109-year history. IBM said it has already built platforms in mainframe computers, information technology services and middleware, a term for software that sits between operating systems and narrower applications.
The latest platform is a bet that customers will rely on multiple cloud services, which it calls the hybrid cloud. IBM's platform allows developers to write their code once, and deploy it to these various clouds. Red Hat, founded in 1993 in North Carolina, provides crucial technology. It uses a proprietary version of Linux, the open-source operating system prevalent in the cloud. IBM closed on its Red Hat acquisition in July 2019.
IBM is betting that this open-source, hybrid-cloud platform will be a foundation for the sale of higher-margin services such as software applications and artificial intelligence.
During a presentation to investors Thursday, Mr. Krishna and Chief Financial Officer James Kavanaugh said that every $1 spent on Red Hat platforms leads to $3 to $5 in the sale of applications and middleware and $6 to $8 in the sale of advanced services such as application modernization, intelligent workflows, multicloud management, security and compliance. IBM expects to share that additional revenue with third parties.
"If it works, it could be a turning point, similar to the one at Microsoft, when [former CEO Steve Ballmer] said we are all in on the cloud," said Daryl Plummer, chief of research for cloud computing at Gartner Inc. "If it doesn't work, it could be a turning point of a different sort."
Like Microsoft's current CEO, Satya Nadella, Mr. Krishna has an engineering background. "He understands software and AI and what creates business value from technology," said Ted Schadler, a principal analyst at Forrester Research Inc. "That opens up a lot, because everything in business is derived from technology and data."
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