IBM splits up company to better focus on cloud and AI

IBM has taken a cleaver to the 109-year old company in order to better focus on its hybrid cloud business, which it sees as a $1 trillion market opportunity.

Specifically, IBM will split off its IT infrastructure services unit, which is comprised of its managed infrastructure services other than hybrid cloud, into a new company by the end of next year. The new company, which is being called "NewCo" until a new brand is in place, provides technical support to more than 4,600 clients in 115 countries.

IBM said NewCo has a backlog of $60 billion and that it will be a publicly traded company. IBM said NewCo would manage and modernize client-owned infrastructures, which it said is a $500 billion market opportunity. The new company will have 90,000 employees, out of IBM's current headcount of 325,000 employees, and its leadership structure will be named over the coming months.

While IBM is putting a positive spin on NewCo, that part of the business has become a low-margin anchor on its high margin cloud ambitions.

While IBM has divested itself from other products and technologies, such as PCs and semiconductors, the split is somewhat reminiscent of Hewlett Packard creating Hewlett Packard Enterprise six years ago while renaming the legacy PC and printing business HP Inc.

Under the IBM brand, the company will drill down on its hybrid cloud growth as well as developing artificial intelligence solutions under its Watson brand. Once the split is completed, IBM will move from a company with more than half of its revenues in services to a majority of cloud software and solutions revenues. IBM said it would also give it more than 50% in recurring revenues.

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While IBM's announcement on Thursday was unexpected, Big Blue has been honing its focus on the cloud ever since it bought open source vendor Red Hat for $34 billion last year. As part of that deal, Red Hat CEO James Whitehurst came over to IBM after which he was later named president.

CEO Arvind Krishna, who led IBM's cloud computing business prior to his promotion, led IBM's charge to buy Red Hat. Krishna replaced former CEO Ginni Rometty, who is now IBM's executive chairman, in April

"IBM is laser-focused on the $1 trillion hybrid cloud opportunity," said Krishna, 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."  

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For telcos, Big Blue has cloud deals in place with AT&T and Verizon, among others, which include AI and edge compute elements. While IBM has made strides in the cloud sector, it still trails Amazon Web Services and Microsoft Azure by a wide margin.

Also on Thursday, IBM provided preliminary financial results for the third quarter. IBM expects third-quarter revenue of $17.6 billion and an adjusted profit per share of $2.58, in line with Wall Street estimates. IBM is slated to report it Q3 earnings on Oct. 21.