IBM plans to spin off infrastructure services as a separate $19B business

Posted by on 8 October, 2020

This post was originally published on this site

IBM, a company that originally made its name out of its leadership in building a myriad of enterprise hardware (quite literally: its name is an abbreviation for International Business Machines), is taking one more step away from that legacy and deeper into the world of cloud services. The company today announced that it plans to spin off its managed infrastructure services unit, a $19 billion business, to help it focus more squarely on newer opportunities in hybrid cloud applications and artificial intelligence.

Infrastrucuture services includes a range of services based around legacy infrastructure and digital transformation related to it. It includes things like testing and assembly, but also  product engineering and lab services, among other things. A spokesperson confirmed to me that the deal will not include the company’s servers business, only infrastructure services.

IBM said it expects to complete the process — a tax-free spinoff for shareholders — by the end of 2021. It has not yet given a name to “NewCo” but it said that out of the gate the spun off company will have 90,000 employees, 4,600 big enterprise clients in 115 countries, a backlog of $60 billion in business, “and more than twice the scale of its nearest competitor” in the area of infrastructure services. Others that compete against it include the likes of BMC and Microsoft.

At the same time that IBM announced the news, it also gave some updated guidance for Q3, which it plans to report officially later this month. It said it expects revenues of $17.6 billion, with GAAP diluted earnings per share from continuing operations of $1.89, and operating (non-GAAP) earnings per share of $2.58. As a point of comparison, in Q3 2019 it reported higher revenues of $18 billion. Last quarter it had revenues of $18.1 billion. Tellingly, the divisions that contained infrastructure services saw declines last quarter.

The market seems to like the news: IBM shares are trading up almost 5% ahead of the market opening.

The move is a significant shift for the company and underscores a bigger sea change in how enterprise IT has evolved and looks to continue changing in the future.

IBM is betting that legacy infrastructure and the servicing of it, while continuing to net revenues, will not grow as it has in the past, and as companies continue with their modernization (or “digital transformation,” as consultants like to refer to it today), they will turn increasingly to outsourced infrastructure and using cloud services, both to run their businesses and to build the services that interface with consumers.

IBM, often referred to as “Big Blue”, is using the announcement as the start of an effort to streamline its business to spur growth (maybe we’ll have to rename it “Medium Blue.”).

“IBM is laser-focused on the $1 trillion hybrid cloud opportunity,” said Arvind Krishna, IBM CEO, in a statement. “Client buying needs for application and infrastructure services are diverging, while adoption of our hybrid cloud platform is accelerating. Now is the right time to create two market-leading companies focused on what they do best. IBM will focus on its open hybrid cloud platform and AI capabilities. NewCo will have greater agility to design, run and modernize the infrastructure of the world’s most important organizations. Both companies will be on an improved growth trajectory with greater ability to partner and capture new opportunities –creating value for clients and shareholders.”

Its purchase of Red Hat in 2019 is perhaps its most notable investment in recent times in IBM’s own transformation.

“We have positioned IBM for the new era of hybrid cloud,” said Ginni Rometty, IBM Executive Chairman in a statement. “Our multi-year transformation created the foundation for the open hybrid cloud platform, which we then accelerated with the acquisition of Red Hat. At the same time, our managed infrastructure services business has established itself as the industry leader, with unrivaled expertise in complex and mission-critical infrastructure work. As two independent companies, IBM and NewCo will capitalize on their respective strengths. IBM will accelerate clients’digital transformation journeys, and NewCo will accelerate clients’infrastructure modernization efforts. This focus will result in greater value, increased innovation, and faster execution for our clients.”

More to come.

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