Reborn IBM looks to the cloud

International Business Machines (US:IBM) was founded in 1911 as ‘The Computing-Tabulating-Recording Company’ – a manufacturer of products ranging from workplace time-clocks to weighing scales and meat slicers. In the intervening years since then, many of its innovative technologies have helped shape the world we live in today.

IBM built the computers and many of the software programmes used for the first manned mission to the moon in 1969. It conceived of the magnetic swipe strip on credit cards. Its Deep Blue supercomputer vanquished the world’s top chess player in 1997. And in January 2019, it unveiled the first ever integrated quantum computing system for commercial use – “designed to one day tackle problems that are currently seen as too complex and exponential in nature for classical systems to handle”.

But it hasn’t always been smooth sailing for IBM on the financial front. The group racked up losses in the early 1990s after struggling to keep up with the dawn of the personal computer (PC). And while concerns about its survival have long since blown over, its growth trajectory hasn’t exactly looked promising in recent years. Between 2012 and 2017, revenues declined from $103m to $79.1m, while pre-tax profits slipped from $22.5m to $11.4m.

That said, 2018 results were relatively reassuring. Chairman, president and chief executive Ginni Rometty described it as “a defining year for IBM”, as the company “returned to growth”. There was, indeed, expansion – albeit small-scale. Sales edged up by 0.6 per cent to $79.6bn, notwithstanding a 3 per cent dip in the final quarter.

Arguably the biggest news for IBM last year was its huge $34bn acquisition of Red Hat, announced in October. Red Hat is the world’s leading provider of open-source cloud software. For IBM bosses, the deal – which is expected to close in the second half of 2019 – is a “game-changer”, rendering the group the number one provider of hybrid cloud in a $1 trillion growth market.

IBM’s existing cloud business took $19bn in sales last year, constituting a robust platform for future growth. But it’s a competitive landscape, to say the least, in which ‘big tech’ players Microsoft (US:MSFT) and Amazon (US:AMZN) are major players. Time will tell how the transaction progresses, and how easily the business integrates into the broader group. For now, we know it will operate as a distinct unit within IBM, retaining its current leadership team.

Such is the scale of the acquisition that IBM has suspended its share buyback programme for 2020 and 2021. In 2018, IBM repurchased $4.4bn-worth of shares – up from $4.3bn in 2017, but short of the levels seen a few years ago. It was also IBM’s 23rd consecutive year of raising its dividend, paying out $5.7bn. The group reckons Red Hat will boost both cash flow and the gross margin within 12 months, while speeding up sales growth and supporting “a solid and growing dividend”.