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Out With the Old and In With the New for Big Blue

By Khader Al-ayrot - Mar 19, 2014 at 11:45PM

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Despite competitors being more established in the new businesses of IBM, the company is still poised to be profitable for investors in the long run.

Last Monday, IBM ( IBM 1.66% ) announced that it will be trimming its workforce by around 13,000 both in the U.S. and abroad. Actually, the company has already started to let go people in various business units, mostly in the systems and technology group, according to some reports. A company spokesperson said that IBM is repositioning itself to succeed in the big data, analytics, and cloud computing realm. This makes sense because, by streamlining overhead, IBM can focus on its new Watson unit and further improve its foothold in cloud technology.

More trims
Jobs aren't the only things IBM is trimming. The company sold its x86 server business to Lenovo last January for a price of $2.3 billion.The x86 server business gave IBM top market share position, according to International Data Corporation, a research firm focused on information technology companies and markets. Servers are used by businesses to track inventory, host websites, and manage bank transactions, among other things. The market for servers is different now that servers are smaller and cheaper than their huge older cousins, and clients are also relying more on the cloud than their own servers.

In addition to selling the x86 server business, news is out that IBM is now looking for a buyer for its semiconductor business. This comes on the heels of earlier news that IBM is also looking to divest its software-defined networking business, a technology for corporate network building.

In with the new
IBM is also hiring, despite cutting jobs, and there are obvious clues as to where the jobs will be. The company recently made a $1 billion investment in its cloud computing business and the recently acquired Cloudant, a mobile database provider and expert in data management. IBM wants Cloudant to be an important cog in its MobileFirst solutions and the creation of applications for mobile devices. With Cloudant on hand, this makes building, testing, and deploying mobile, web, and cloud apps easier for clients. This business unit is expected to drive growth for IBM. The company also made a $1.2 billion investment to build 15 data centers worldwide.

What the numbers say
Indeed, earnings for 2013 show that, despite decreasing profits in hardware, once the bread and butter of the company, the year ended with $16.5 billion net income, down only 1%. Earnings per share for 2013 were $14.53. 

Focusing on the future
This reorganization is in line with what IBM CFO Martin Schroeter had laid out last January for 2014: shifting investments to growth areas, acquiring key competences, letting go of businesses, and reorganizing the workforce. The aim has been to return value to shareholders, as IBM has targeted delivering full-year 2014 GAAP earnings per share of at least $17.

IBM is still a dependable, profitable blue chip. IBM's stock has a 52-week range of $175.19-$215.90 per share. All of its business developments target improving growth for 2014. Cloud-based services is expected to generate approximately $7.0 billion in revenue by 2015. Software and services revenue is also expected to bring $50 billion by 2015. Despite competitors being more established in the new businesses of IBM, the company is still poised to be profitable in the long run.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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