International Business Machines Corp Breaks New Ground With Cognitive Computing Unit

Big Blue adds another arrow to its strategic imperatives quiver.

Tim Brugger
Tim Brugger
Oct 12, 2015 at 3:30PM
Technology and Telecom

Thanks in large part to a nice run this past week, IBM's (NYSE:IBM) stock price has slowly inched up about 6% so far in October, as of this writing. However, its recent gains have simply eased IBM's year-to-date stock-price declines, which now sit at about 5%. The problem appears to be the unwillingness of investors to look past the notion that IBM is no longer all about PCs and hardware.

Hardware and software sales both dropped double digits last quarter, which of course plays right into the hands of IBM naysayers; but that will almost certainly change before long. The "new" IBM is all about CEO Ginni Rometty's "strategic imperatives," consisting of cloud services, business analytics (which houses its super-computer Watson), security, social media, and mobile solutions. IBM has recently added one more item to its list of strategic imperatives, and it could prove to be another winner.

New and improved
Much was made of IBM's decision nearly two years ago to invest $1 billion to start a distinct, Watson-centric business unit. The new Watson and Watson Health divisions were just the tip of the iceberg of Rometty's strategic imperatives. IBM directed about $3 billion to jump-start a separate Internet of Things (IoT) division, and about $4 billion in total for its full slate of strategic imperatives.

Add a few more billion invested into futuristic nanotechnology chip design and about 30 acquisitions in the past few years, and it's safe to say that IBM is moving in its new direction wholeheartedly. There's a common thread that runs through each of the strategic imperative units of the new IBM: data.

Be it cloud-related, data security, business analytics, or mobile, IBM is all about housing, analyzing, and ultimately utilizing information -- and for good reason. As the world around us becomes more connected, the sheer volume of data is already enormous, and growing. The real challenge is getting the most effective, actionable results from analyzing all that information, and that's where cognitive computing enters the picture. It's also why IBM has announced it's opened a new Cognitive Business Solutions unit.

The new division will consist of "2,000 consulting professionals spanning machine learning, advanced analytics, data science and development," and will quite naturally work hand in glove with IBM's Watson group. As per research firm IDC, half of all consumers, whether we realize it or not, will regularly interact with services derived from cognitive computing in just three years.

What it means
Somewhat lost in IBM's Q2 earnings -- and if the past is any indication will likely be overlooked again this quarter -- were the strides made in IBM's core businesses. At a run rate of $4.5 billion, IBM's cloud sales are skyrocketing. Though IBM wouldn't divulge specific Watson-related revenue, the business analytics unit in which it resides climbed more than 20% in Q2, after accounting for currency headwinds.

To put the consistent growth of IBM's strategic imperatives into perspective, the key drivers of its future growth already make up an estimated 27% of total revenue. For a company that generated just shy of $21 billion in sales last quarter alone, the 27% of the revenue pie owned by IBM's strategic imperatives is even more impressive. And IBM doesn't plan on stopping there.

As per Rometty, by 2018, IBM expects that 40% of all revenue will be derived from its strategic imperative units, including its new Cognitive Business Solutions group. With so much upside, naturally IBM is hardly alone in pursuing its cognitive computing, cloud, big data, security, and IoT solutions. Combined, these burgeoning markets are expected to become massive.

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What separates IBM from the rest of the pack is that it recognizes the opportunity these new technologies bring in turning all that data into tangible results, and that requires cognitive computing capabilities. For investors, IBM's strategic imperatives results should be the focus of its upcoming Q3 earnings news on Oct. 19. Those, and the fact that IBM pays a 3.4% dividend yield and is trading at just more than nine times forward earnings.