IBM CEO Rometty: 'We Are Not Exiting Hardware'

NEW YORK (TheStreet) - Just 6 weeks after clinching a $2.3 billion deal to sell IBM's (IBM) low-end server business to Lenovo, CEO Ginni Rometty vowed to maintain the company's significant hardware presence in her annual letter to shareholders.

The Lenovo deal, which was announced in late January, prompted a flurry of media reports that IBM was looking to sell off other chunks of its hardware, such as its chip making operation.

"Let me be clear-we are not exiting hardware," wrote Rometty, in the letter, which will be released to shareholders tomorrow. "IBM will remain a leader in high-performance and high-end systems, storage and cognitive computing, and we will continue to invest in R&D for advanced semiconductor technology."

Revenue from IBM's Systems and Technology Group was $14.37 billion in 2013, a year-over-year decline of 18.7%, or 18% adjusted for the effects of currency, according to the company's annual report. Big Blue said that this impacted its overall performance. The tech heavyweight, which competes with the likes of HP (HPQ), Microsoft (MSFT) and EMC  (EMC), has been tightening its focus on high-margin areas such as software and services for a number of years.

IBM's 2013 software revenue was $25.93 billion, a year-over-year increase of 1.9%, or 2.9% adjusted for currency, while Global Business Services revenue was $18.4 billion, a return to revenue growth at constant currency. Big Blue's total 2013 revenue was $99.75 billion, down 4.6% from the prior year, or 2.5% adjusted for the effects of currency.

In her letter, Rometty described 2013 as a successful year for IBM, but acknowledged that "our performance did not meet our expectations." The CEO pointed, in particular, to the company's operating pre-tax income, which declined 8% year-over-year, and its overall revenue dip.

"So, while we continue to remix to higher value, we must also address those parts of our business that are holding us back. We have two specific challenges, and we are taking steps to address both," wrote Rometty. "The first involves shifting the IBM hardware business for new realities and opportunities. We are accelerating the move of our Systems product portfolio-in particular, Power and storage-to growth opportunities and to Linux, following the lead of our successful mainframe business."

The server sale to Lenovo is a key part of this effort, according to the IBM chief. "This divestiture is consistent with our continuing strategy of exiting lower margin businesses, such as PCs, hard-disk drives and retail store solutions," she explained.

In the letter, Rometty outlined three strategic imperatives for IBM - making markets by transforming industries and professions with data, remaking enterprise IT infrastructure for the cloud era, and enabling "systems of engagement" for enterprises.

With regard to transforming industries, the CEO noted IBM's business analytics revenue rose 9% in 2013, led by Global Business Services and Software. "This is already a nearly $16 billion business for us, and we have raised our expectations for it," she wrote. Just over a year ago, the tech giant increased its 2015 revenue target for analytics and big data to $20 billion from $16 billion.

Big data refers to the management of vast quantities of unstructured data, or information that is outside the realm of traditional databases. Examples include email messages, PowerPoint presentations, audio, video and social media information.

IBM Chart IBM data by YCharts

Addressing the opportunity in cloud, Rometty wrote that IBM's cloud business grew 69% in 2013, generating $4.4 billion in revenue. "As we actively embrace cloud in order to deliver 'IBM as a Service' to our clients, we expect to see significant benefits in client experience, revenue growth and enterprise productivity," she wrote.

Experts have already identified 2014 as a crucial 12 months in IBM's 103-year history. The company has kicked off the year with a slew of major announcements such as the Lenovo deal, billion-dollar investments in Watson supercomputer and cloud technology and plans to rebalance its workforce.


Jeffrey Sonnenfeld, senior associate dean for Executive Programs at The Yale School of Management and an expert on strategic leadership, applauded IBM's shifting focus. "It's a tremendous model of an iconic brand profoundly refreshing itself from stem to stern," he said, in a phone interview. "They now have the technology infused business tools that give them business service leverage that nobody else has."

(Sonnenfeld is a former member of TheStreet's Board)

As one of the tech sector's best-known dividend payers, IBM's cash position is always of interest to shareholders. The tech giant's free cash flow, crucially important for generating healthy dividends and share repurchases, was $15.02 billion in 2013, a decrease of $3.16 billion from the prior year. Nonetheless, IBM returned $17.92 billion to shareholders in 2013 - $13.86 billion in gross share repurchases and $4.06 billion in dividends.

IBM shares, which have fallen 7.51% in the last 12 months, closed up 0.02% at $187.68 during Friday trading.

--Written by James Rogers in New York.

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