It's no secret that IBM (NYSE:IBM) is in the midst of a significant business transition. Like others once reliant on the slowing PC market -- Microsoft (NASDAQ:MSFT) immediately comes to mind -- IBM has gone all in on burgeoning new technologies, including the cloud, big data, and the Internet of Things (IoT), along with cognitive computing-based analytics associated with each of these fast-growing markets.
IBM's new-ish business focuses are parts of CEO Ginni Rometty's "strategic imperatives", and each has been bolstered by billions of dollars in acquisitions. In addition to buying up assets to jump-start Rometty's strategic units, IBM has inked several partnerships, including an agreement to work with The Weather Company's massive data sets via IoT and the cloud.
IBM has since taken its alignment with The Weather Company a step further, announcing it will acquire the digital assets -- the deal doesn't include The Weather Channel -- for what is rumored to be north of $2 billion. IBM wouldn't confirm the financial terms of the deal, but it appears to be another whopper.
The question is: when will investors start seeing some return on IBM's multiple investments?
A few specs
In March of this year, IBM said it was committing $3 billion to bring cognitive computing to IoT via its Watson unit. According to IBM, the plan is to buy The Weather Company's massive cloud data platform -- it currently handles over 26 billion inquiries each day -- and let Watson loose on all that information, which will "empower richer and deeper insights" across the super computer's platform.
The arrangement also includes The Weather Channel licensing weather forecast and analytics from IBM. In addition to expanding Watson's capabilities, IBM will utilize all that information to enhance The Weather Company's data-driven web and mobile advertising efforts.
This recent acquisition is the latest in a long line of investments IBM is making in its strategic imperatives. The laundry list of recent cloud, analytics, big data and IoT deals include $1 billion for Merge Healthcare and undisclosed amounts for privately held health and related data firms, including Phytel, Bluebox, Cleversafe, StrongLoop, and a host of others.
The acquisitions are on top of IBM's commitments to build a "Watson world headquarters" in Cambridge, MA., a hub in Silicon Valley, and a host of industry partnerships, all with its strategic imperatives at the core. So what are investors getting in return for all of IBM's spending and efforts?
The envelope please
IBM won't share specifics, but working backwards may give investors an indication of how all the acquisitions and investments in its strategic imperatives are affecting its bottomline.
As per Rometty, IBM's strategic imperatives currently make up 27% of total revenue, with plans to reach 40% by 2018. In Q3 IBM generated $19.3 billion in revenue, which means that $5.2 billion -- 27% of total sales -- were of the strategic imperative variety. After shifting much of its existing business to the cloud, in addition to new revenue, IBM reported that its total cloud revenue was $9.4 billion the trailing 12 months, or $2.35 billion quarterly.
That said, approximately $2.35 billion of IBM's $5.2 billion estimated strategic imperative revenue last quarter was cloud-related. An impressive figure, given that Microsoft and its $8.2 billion annual run-rate is widely hailed as the king of the cloud. Based on new cloud sales, Microsoft remains at the top of the heap, but IBM is quickly moving up the ladder.
Based on the aforementioned estimates, big data, analytics, and IoT -- along with mobile and social media -- generated the remainder of IBM's strategic sales of approximately $2.85 billion last quarter ($5.2 billion less the cloud's $2.35 billion in revenue). If that's the case, or anything close to it, IBM investors should be ecstatic. Then again, if it were true, wouldn't IBM share the good news?
The difficulty, and it's a common one when trying to tie down cloud, IoT, and big data industry sales, is investors have no way of knowing exactly what is, and what isn't, included in IBM's strategic imperative revenue calculations. Either way, after so much investment of time and money, it's about time IBM cracked its secretive, strategic imperative doors open a bit so investors can see what all the fuss is about.