By Dave Sebastian and Asa Fitch
International Business Machines Corp. plans to spin off its unit that manages clients' information-technology infrastructure and accounts for nearly a quarter of its sales and staff, a major step in the 109-year-old tech pioneer's effort to focus on the faster-growing cloud-computing business and artificial intelligence.
The move IBM announced Thursday would separate a large chunk of its broader IT services business, which for years has been its biggest revenue driver. But the business has shrunk as customers have embraced cloud computing and has become an earnings drag for Big Blue.
Executives said on a conference call that the managed-infrastructure-services unit had about $19 billion in sales over the past year, adding that the new company formed would have about 90,000 employees and a backlog of $60 billion. IBM reported $77.15 billion in total revenue for 2019 and 352,600 total employees.
Investors welcomed the news, sending IBM's shares up more than 7% in Thursday trading. The stock had been down 7% this year through Wednesday's close, lagging cloud rivals that have seen big gains during the pandemic with companies shifting more work online. Microsoft Corp. shares are up more than 30% and shares in online retailer Amazon.com Inc., the largest cloud-services provider, are up more than 70%.
The spinoff announcement comes a few months after the Armonk, N.Y., company said it was cutting an unspecified number of jobs in the first major workforce reduction under Chief Executive Arvind Krishna. He assumed the role in April and is trying to revive growth at the tech company. The layoffs were made against the backdrop of the Covid-19 pandemic, which has caused many IBM customers to dial back investments and hold off on big software deals.
Even before the health crisis, IBM has been struggling through a yearslong effort to reposition the company. Sales have fallen around 25% in the past eight years, and the company trails the likes of Amazon.com and Microsoft in cloud computing -- where companies rent rather than buy computing horsepower.
IBM signaled its focus on the cloud with the appointment of Mr. Krishna as CEO after his predecessor Ginni Rometty -- now executive chairman -- struggled to inject growth. Mr. Krishna ran the company's cloud and cognitive-software division. IBM also named Jim Whitehurst -- CEO of Red Hat, the open-source software giant that IBM acquired for about $33 billion last year -- as its president, the first time in decades it has given an executive that singular title.
IBM has been trying to capitalize on what it calls the hybrid cloud, which companies use to manage software and other systems across different cloud services and their own data centers. IBM saw the deal for Red Hat, which was the most expensive in its history, as an opportunity to gain on competitors in cloud computing.
The technology-services division that encompasses the unit to be spun off has been a headache for IBM for a while. Sales in the entire services division fell 6.1% last year, though it remained IBM's largest by revenue at roughly $27.4 billion -- or about 35% of the company's total.
In April the company recorded a $900 million charge against earnings, largely to cover restructuring costs linked to the services division. The company in January had signaled it was planning changes at the unit to bolster its competitiveness.
IBM said Thursday the yet-to-be-named company already has relationships with 4,600 clients in 115 countries and operates in what it sees as a $500 billion market. The new company would be able to partner across all cloud vendors, providing the opportunity for stronger profits and cash generation, IBM said. The separation is expected to be completed by the end of 2021.
In connection with its plans Mr. Krishna said IBM expects to record $2.3 billion in accounting charges by the end of the year.
The company Thursday also reported third-quarter profit and revenue that were roughly in line with Wall Street's expectations. For the September-ended quarter, IBM posted preliminary earnings from continuing operations of $1.89 a share, or $2.58 a share on an adjusted basis, on revenue of $17.6 billion. The company said it would release its full quarterly report later this month.
Write to Dave Sebastian at firstname.lastname@example.org and Asa Fitch at email@example.com
(END) Dow Jones Newswires