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IBM Offloads Legacy Business to Focus on $1 Trillion Cloud Industry

By Nicholas Rossolillo – Oct 8, 2020 at 7:22PM

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The tech titan of yesteryear has a focused plan to jump-start its business.

Embattled tech relic IBM (IBM 1.65%) has made many attempts to right its flagging business over the years, thus far to no avail. However, in spring 2020, CEO Arvind Krishna -- former Senior Vice President of IBM's cloud and cognitive software segment and a key player in the 2019 acquisition of Red Hat -- took the reins of the company. Year-to-date results have again been lackluster, even as cloud computing has become more important than ever before during the pandemic. True to his roots, though, Krishna recently announced IBM will spin off its managed infrastructure services unit into a separate business to focus solely on the cloud.

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Freeing Red Hat from dead weight

During the 2020 second quarter, IBM's total revenue fell 5.4% year over year to $18.1 billion. Masking cloud computing segment strength -- including a 17% increase in Red Hat sales and a total cloud segment advance of 30% overall to $6.3 billion -- was an 8% decline in its global technology services segment to $6.32 billion.  

The culprit was the managed infrastructure business, which is now suffering as legacy IT spending takes a hit this year because of COVID-19. By spinning it off into its own business, Krishna's plan is to whittle IBM down to a cloud-focused enterprise -- one that better reflects the company's original vision when it took over open source cloud application developer and manager Red Hat last year. The spun-off business will initially have a market cap of some $19 billion. IBM expects to complete the divesture by the end of the year. IBM as a whole currently has a market cap of $117 billion.

Besides being able to focus on the growing public and private cloud computing market (currently homing in on $1 trillion a year in global spending within the next decade), offloading the older business should also improve the new IBM's profitability going forward. In Q2, global technology services' gross profit margin on services rendered was just 34% compared to 77% for its cloud and cognitive software segment. Put simply, this could be a real game changer for the legacy tech firm.

Nicholas Rossolillo has no position in any of the stocks mentioned. His clients may owns shares of the companies mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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