For the first time I can remember IBM has changed its financial reporting, bracketing its microelectronics OEM business into a discontinued business line: consequentially making it impossible to assess how it did exactly against the third quarter last year. It reported a net loss of $3.4b net loss for the discontinued businesses, reducing its total net income to just $18m.
I’m sure you’re wondering, like me, about its strategy and actions.
There are 3 parts of IBM being offloaded:
- System x to Lenovo took place on October 2nd, so its revenues of around $456m were included in the results
- Its Customer Care BPO service was sold to Synnex for $505m in September – again these revenues were included
- Microelectronics fabrication has been offloaded to GlobalFoundries with IBM giving $1.5b over a 3 year period – its revenues of around $450m have been excluded from its latest report
In total these accounted for $7b in revenues and pre-tax losses of around $500m in 2013. In a call with investors Gini Rometti indicated that these disposals are helping IBM get to a higher-value business, although she also noted that the company’s going to miss its goal of getting to an EPS of $20 in 2015.
But it wasn’t just the financial consequences of the offloads that disappointed – it also reported that software revenue was down 2% (weaker due to some sales issues) and that in services it missed its productivity improvement goals; a short-fall in September revenues was also due to external factors including the poor economic environment and some dynamic currency exchange rate movements.
For IBM the world of geography has been turned on its head for some time, with the ‘growth’ markets continuing to decline (China and India included) faster than the ‘major ones’. On the positive side it reported double-digit growth in Latin America (led by Brazil) and good results in the Middle East and Africa region.
It is improving its profitability by building vertically integrated Cloud, Security and Smarter Commerce businesses as well as offloading the less profitable ones.
So what of the chip fabrication spin out? Offloading chip fabrication makes it the equivalent of Oracle, ARM and AMD – in fact everyone other than Intel. GlobalFoundries is a private company owned by Emirate of Abu Dhabi, set up by AMD’s decision to become fab-less in 2009 and the acquisition of Chartered Semiconductor in 2010 – AMD has disposed of its 14% stake in 2012. IBM has signed a 10-year deal with GlobalFoundries to produce the processors it will continue to design. The deal includes fabrication plants at East Fishkill, New York, and Essex Junction, Vermont, as well as around 3k staff. It’s likely to be well scrutinised in coming months – not least because the US Federal Government has a deep – and perhaps sometimes secret – dependence on IBM as a semiconductor maker and not just designer.
I hope IBM isn’t over-reaching itself in trying to become super-profitable: after all companies have a value in their entirety – there not just a sum of the parts. Speeding up its on-going transformation isn’t necessarily the only solution to its problems.