IBM Poised for Growth, Chief Says

Steve Lohr

This is a "rocky time" for IBM. That is the frank verdict from Virginia M. Rometty, the technology giant's chief executive.

In recent years, revenue growth at IBM has been stubbornly elusive, and new technologies like cloud computing have risen to threaten the company's traditional hardware and software businesses. Those concerns have weighed on the company's stock price, which has been stagnant since Ms. Rometty took over nearly two and a half years ago.

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But in an interview at IBM's headquarters in Armonk, N.Y., Ms. Rometty said she and the company now had a clear vision for how to pursue another generation of growth.

Virginia 'Ginni' Rometty, chief executive officer of International Business Machines Corp.
Angel Navarrete | Bloomberg | Getty Images

The company, she says, has jettisoned less profitable business and made major commitments in new fields — like technology to help customers find insights in today's flood of digital data, and cloud-style computing in which processing and software is delivered remotely over the Internet. Cloud computing, she insists, can be converted to an opportunity for IBM.

"We are transforming this company for the next decade," she said, sounding a theme she plans to use on Wednesday at the company's yearly meeting with investment analysts. "That is not a one-year job, not when you're a hundred billion-dollar company."

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The challenge facing Ms. Rometty, 56, is similar to those faced by previous IBM executives: figure out how to move to new business opportunities faster than the lucrative, older businesses erode.

Over the years, personal computing, the Internet and Indian services firms seemed like dire threats to the company. Each time, IBM adapted and invested, and emerged remade and reinvigorated.

"I feel very good about the direction and how we've crystallized it," she said. She later added, "We are making progress, and we just need to keep moving with speed."

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Ms. Rometty characterized some problems, like the falloff in its once-booming China business and the losses in its semiconductor unit, as relatively fleeting or fixable. Less than 15 percent of IBM's revenue comes from hardware sales, but a down cycle in that business can hit hard, as it has in the last year.

One ingredient in the fix-it formula is shedding profit laggards. In January, IBM announced it was selling its division that makes industry-standard server computers to Lenovo of China for $2.3 billion.

Ms. Rometty's message to IBM's more than 400,000 employees is to embrace the future, and quickly, rather than resist it. The abrupt change in the company's approach to cloud computing recently, analysts say, is an example.

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IBM, analysts say, was slow to grasp the significance of cloud computing. That technology, they note, is the most pointed threat to IBM because it has the potential to displace big parts of the company's business of selling hardware, software and services to corporations in their data centers.

For years, analysts say, the company's SmartCloud offering was a fairly typical response of an incumbent supplier to a new technology. It was treated as an extension of IBM's existing product line rather than something genuinely new.

But IBM signaled a new strategy starting last June, when it bought a fast-growing cloud computing start-up, SoftLayer Technologies, for $2 billion.

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Since then, the "cloud DNA," as one analyst put it, has taken root at IBM. In January, the company said it was investing $1.2 billion in cloud data centers, with a goal of having 40 cloud-dedicated centers in 15 countries by the end of 2014. In February, IBM announced it planned to invest $1 billion to build cloud software development tools and attract outside programmers, who want to make cloud applications for corporations. The initiative is called BlueMix.

"IBM has made investments and there is a real urgency now in its cloud business," said Frank Gens, chief analyst for IDC, a research firm.

IBM faces plenty of competitors in the cloud market, including Amazon, Microsoft, Google and Salesforce. And analysts say that as the largest supplier to corporate data center technology, IBM has the most to lose when companies move from traditional data-center computing to cloud rivals of IBM.

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Amazon Web Services, analysts say, is the clear leader in so-called public cloud computing, in which services are delivered remotely from Amazon data centers. Public cloud computing, analysts say, is where the growth prospects and developer interest is greatest.

IBM, which reported that its cloud business grew 69 percent last year, to $4.4 billion, still gets most of its sales from "private" clouds, in which companies deliver cloud-style services to their employees from their own data centers.

While IBM is being tested by new competitive threats, it comes to the fray with formidable strengths. Unlike the mid-1990s, when the company had to cope with technology shifts while it was in a tailspin, IBM is highly profitable today, with net income of $16.5 billion last year. Much of the money comes from deep in the digital engine rooms of corporations and government agencies.

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"Planes don't fly, trains don't run, banks don't operate without much of what IBM does," Ms. Rometty said.

The shortage of growth at IBM is partly by design — and has been for years. Since 2000, the company has sold off businesses that collectively generated $16 billion in sales, including personal computers and disk drives. Since Ms. Rometty became chief executive in 2012, units with $2 billion in revenue have been shed, and when the sale to Lenovo is completed this year, she will have divested operations with revenue of $6 billion.

Profit trumps growth at IBM. "We don't want empty calories," Ms. Rometty said. "So when people keep pushing us for growth, that is not the No. 1 priority on my list."

IBM's largest single investment in growth is in helping companies exploit the digital data deluge from corporate databases, sensors, smartphones, the web, social networks and elsewhere. That push into the field now called big data began years ago, and Ms. Rometty played a central role in shaping the strategy before she became chief executive.

Since 2005, IBM has invested $24 billion in the data analytics business, including $17 billion on 30 acquisitions. In 2013, the business generated nearly $16 billion in revenue.

So if IBM makes less money in the future selling hardware, software and services for corporate customers' data centers, it plans to make more money helping its customers make sense of data — to cut costs, increase sales, innovate and personalize product offerings.

Watson, the project that defeated human "Jeopardy" champions three years ago, is at the summit of the new field of data-driven artificial intelligence. And IBM is converting the technology from an applied science to a business — as a clever assistant in health care, drug discovery customer service and financial planning.

In January, IBM said it would invest $1 billion to create a separate Watson business unit and fund start-ups that want to build applications on the Watson technology. It is another long-term bet for Ms. Rometty, and Watson will be offered as a cloud service.

By Steve Lohr of The New York Times