IBM splits into two, now the tech giant will become a company that derives more than half of its revenues from recurring revenues in the form of subscriptions rather than managed services.
IBM splits into two
IBM said it will move its managed infrastructure services unit to a new company that will focus on its hybrid cloud business, which includes Red Hat, recently acquired for $34 billion. The new company will focus on managing data centers and cloud infrastructure for customers.
IBM also reported higher than expected third-quarter revenues of $17.6 billion. Wall Street expected revenues of $17.54 billion.
There will be many details still to be worked out as the spin-off will not be completed until the end of 2021. But basically, IBM’s plan looks like this:
- The new company will design, operate, and modernize the infrastructure for customers.
- IBM will focus on its cloud computing platform led by Red Hat as well as on growth markets such as artificial intelligence and hybrid cloud.
- Big Blue said this will streamline its operating model and simplify managed infrastructure services.
- When the managed infrastructure business is created, IBM will move from a company where half of the revenue is services revenue to a company where more than 50 percent of sales will come from recurring revenue.
The IBM CEO Arvind Krishna said, “Customers’ needs for application and infrastructure services procurement are diverging as the adoption of our hybrid cloud platform accelerates. In a conference call, Mr. Krishna said this initiative is redefining IBM. “I am focused on the priority of growth and winning the architectural battle in the cloud with Red Hat,” he said. “Our actions will accelerate our growth strategy in the hybrid cloud.
Mr. Krishna said the foundation is in place for IBM’s growth. He added that customers are buying technology on different cycles and with different managers compared to managed infrastructure. “We are creating two companies that are focused on what they do best,” said Mr. Krishna. “We will create value by focusing on what they do best”.
IBM will have revenues of approximately $59 billion after the spin-off, with the new company having revenues of $19 billion. Ultimately, IBM is separating from the managed infrastructure business to become a platform company with the economics that go with it.
Details of the new company
This spin-off company, which does not yet have a name, will have more than 4,600 regulated customers in 115 countries. The new company also has 90,000 employees. IBM said the managed infrastructure unit will have more than 75 percent of Fortune 100 customers and a backlog of $60 billion.
According to IBM, the managed infrastructure unit will be able to move faster to modernize the infrastructure and partner with all cloud computing providers. The new company will also be an IBM partner. Once the spin-off is created, the two companies combined are expected to pay a shareholder dividend that would be no less than what IBM shareholders currently receive.
This is what IBM and the new company will look like after the spin-off: