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IBM Re-Balancing Their Portfolio

Posted on Thursday, Feb 13th 2014

Gartner’s recent report on worldwide IT spending estimates IT spending to grow 3.1% to $3.8 trillion in 2014. Enterprise software is expected to be the strongest growing market with spending projected to increase 6.8% to 320 billion in 2014. It is followed by a 4.5% growth in IT services to $963 billion. Spending on devices is projected to grow 4.3% this year to $697 billion while data center systems are projected to grow 2.6% to $143 billion. Telecom services will be the slowest growth segment with the market growing 1.2% to $1,653 billion.

IBM’s Financials

IBM’s (Nasdaq: IBM) fourth quarter revenues fell 5% over the year to $27.7 billion, missing the market’s expectations of $28.27 billion. EPS of $6.13 was, however, ahead of the Street’s projections of $5.99.

By segment, revenues for the software segment grew 3% over the year to $8.1 billion. Systems and technology segment revenues fell 26% to $4.3 billion and revenues from the IT services unit fell 4% to $9.9 billion. Business services revenues managed to report a marginal growth of 0.6% to $4.75 billion.

They ended the year with revenues declining 5% to $99.75 billion and an EPS of $16.99.

For the current year, IBM projected an EPS of at least $18.00, falling marginally short of the Street’s projections of $18.02.

IBM’s High Margin Business Focus

Recently, IBM has been focused on re-balancing their offerings portfolio. Last month, they sold their low end x86 server business to Lenovo for an estimated $2.3 billion. The x86 server business had seen earnings decline last year by 19%. More recently, IBM is evaluating sale of their semiconductor business as well. IBM’s chips include the PowerPC lineup, which have been used in personal computers, gaming devices, and other equipment. They have hired Goldman Sachs to explore potential buyers for the chip manufacturing operations. They plan to retain their chip-design operations. If a sale does not appear feasible, then they are even open to a joint venture for these operations.

Sale of their server business and the chip manufacturing segment will help IBM improve their profitability. Post the sale, they will be able to focus on high-margin, high-growth businesses like the cloud. As part of this focus, they recently announced the acquisition of Aspera for an undisclosed sum. Aspera is a privately held organization best known for their fast and secure protocol (FASP) that helps transfer large data files securely over the cloud within an instant. Their service gives customers an efficient way to transport data within cloud networks. They are known to be able to deliver the industry’s fastest transmission speeds over any network link regardless of file size, transfer distance, or network conditions. The move will help IBM expand both in big data and cloud computing.

IBM’s stock is trading at $179.93 with a market capitalization of $188.91 billion. It touched a 52-week high of $215.90 in March 2013.

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