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10/20/2014
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IBM Sells Chip Business, Declines Continue

IBM pays GlobalFoundries $1.5 billion to take over chip-manufacturing unit. Revenues and profits from continuing operations slide.

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IBM on Monday reported disappointing results for its third quarter even as it wrapped up yet another major divestiture, paying GlobalFoundries $1.5 billion to take over its semiconductor manufacturing operations in New York and Vermont.

"We are executing on a clear strategy that is moving IBM to higher value," said Ginni Rometty, IBM chairman, president, and CEO, in a statement. "This includes the announcement that we will divest semiconductor manufacturing to focus on research and development [and]... we will continue to make the investments and the changes necessary to manage our business for the long term."

IBM's moves to higher value thus far in 2014 have included exiting a low-margin customer-care outsourcing business, selling its commoditized x86 server business to Lenovo for $2.3 billion, and now giving GlobalFoundaries considerable intellectual property as well as $1.5 billion in cash over three years to take over its costly chip-manufacturing operations.

[Want more on IBM recovery efforts? Read IBM 2Q Results Hint Of Turnaround.]

These three businesses combined generated more than $7 billion in revenue in 2013, but they incurred more than $500 million in annual pre-tax losses, according to IBM. IBM is taking a charge of $4.7 billion against its third-quarter results to account for the GlobalFoundaries deal.

IBM is getting out of these unprofitable businesses to focus on high-growth and high-margin areas, yet the company's results from continuing operations were disappointing, Rometty conceded.

"We saw a marked slowdown in September in client buying behavior, and our results also point to the unprecedented pace of change in our industry," said Rometty.

In a blow to investor confidence, IBM announced it no longer expects to deliver at least $20 in operating earnings per share in 2015, which had been a long-term goal for the company and a reason for investor confidence despite declining revenue in recent years.

IBM reported a 4% year-over-year decline in revenue from continuing operations to $22.4 billion, while earnings declined 17% from the prior-year quarter to $3.5 billion. In a conference call with investors, IBM CFO Martin Schroeder attributed the declines to weaker-than-expected software sales, lower-than-expected services productivity, and negative economic and currency conditions.

Software sales totaled $5.7 billion, down 2% from the prior-year quarter. While WebSphere, Tivoli, and Workforce Solutions software sales grew, the Information Management segment was off 5% and Rational software development business was off 15%.

In the Services segment, reported revenue was down 3% to $9.2 billion. Global Technology Services revenue was off 5% from the prior-year quarter, while Global Business Services reported a 7% decline.

The effects of the negative economic and currency climate included a 7% decline in sales to the BRIC countries of Brazil, Russia, India, and China. This impact was particularly notable in the Systems & Technology (hardware) segment, where revenue declined 15% year-over-year to $2.4 billion.

IBM continues to say growth in strategic areas including cloud, business analytics, mobile, and security will bring growth and profits. It said year-to-date cloud revenue is up more than 50%, reaching a third-quarter run rate of $3.1 billion. Business analytics revenue is up 8%, mobile has "more than doubled," and security revenue is up more than 20% year-to-date, IBM said.

Where other big IT giants, like Oracle and SAP, seem to be transitioning to the cloud while reporting flat to mildly positive results, IBM has seen slow, steady declines in revenue that its growth engines can't seem to overcome. Thus far, divesting loss-leading businesses has not turned the tide, but IBM has said a tough 2014 should set the stage for positive results in 2015.

As part of the deal with GlobalFoundries, that company will become IBM's exclusive supplier of 22-nanometer (nm), 14-nm, and 10-nm semiconductors for its servers for the next 10 years. IBM will remain in the chip-design business, continuing a $3 billion investment over five years, announced earlier this year, to develop next-generation chips. GlobalFoundries will have "primary access" to that research, said IBM, through joint collaboration at the Colleges of Nanoscale Science and Engineering at the State University of New York (SUNY) Polytechnic Institute in Albany, NY.

Just when conventional wisdom had converged around the cloud being a software story, there are signs that the server market is poised for an upset, too. Get the 2014 State of Server Technology report today. (Free registration required.)

Doug Henschen is Executive Editor of InformationWeek, where he covers the intersection of enterprise applications with information management, business intelligence, big data and analytics. He previously served as editor in chief of Intelligent Enterprise, editor in chief of ... View Full Bio

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SaneIT
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SaneIT,
User Rank: Ninja
10/23/2014 | 7:31:04 AM
Re: IBM subsidizes offloading of chip business
You're correct that anyone not already invested will be wary but those who need the chipsets will have plenty of time to transition and chances are that time will be long enough to move to a new architecture well before GlobalF stops the production line.  We're looking at a 10 year run which will no doubt end with a surplus that will last another 10 years.
D. Henschen
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D. Henschen,
User Rank: Author
10/21/2014 | 11:38:00 AM
Re: is 10nm small enough?
No, 10nm is not small enough. That's another reason IBM unloaded its facilities to GlobalFoundries. The next-gen chips IBM is researching will be 7nm and smaller and will require alternatives to conventional silicon and silicon-on-copper capabilities of these existing plants. The next-gen will demand new manufacturing techniques such as carbon nanotubes or some such exotic material that has yet to be brought into full-scale production.
Whoopty
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Whoopty,
User Rank: Ninja
10/21/2014 | 11:19:09 AM
is 10nm small enough?
I understand that there is a limit on how small you can make a silicon chip, but will 10nm really carry IBM through the next decade? I'd have thought that within five-10 years time we'll be needing smaller chips than that. 
jastroff
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jastroff,
User Rank: Ninja
10/20/2014 | 6:24:17 PM
Re: When is a "sale" not a sale
Perhaps the "sale" of the PC division to Lenovo went better for IBM...
Charlie Babcock
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Charlie Babcock,
User Rank: Author
10/20/2014 | 5:38:36 PM
IBM subsidizes offloading of chip business
I could have explained that comment a little more. The subsidy carries on for three years. How much extra capacity beyond serving IBM's needs will GlobalFoundries maintain for the Power architecture after three years? That is, if you gamble on Power as a third party cloud service provider, and need a server refresh every three years, won't additional large scale buyers have to materialize to keep GlobalFoundries in full production? And if they don't, will GlobalF be willing to maintain capacity beyond IBM's needs? Won't it seek to avoid losing money on the Power architecture after three years? How might it do so? Most cloud builders will be wary of the uncertainty contained in that outlook.  
D. Henschen
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D. Henschen,
User Rank: Author
10/20/2014 | 5:05:39 PM
Re: IBM handicaps futue of Power in the cloud
I'm not sure what you mean by three years. There's a 10-year committment for GlobalFoundaries to supply chips to IBM.
Charlie Babcock
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Charlie Babcock,
User Rank: Author
10/20/2014 | 4:51:38 PM
IBM handicaps futue of Power in the cloud
The Power architecture has many server attributes that x86 does not. IBM has been trying to convince cloud service providers that Power offers a more cost effective server for the amount of work done than Intel. This was a steep hill to climb before, and so far, only the European service provider, OVH.com, has bitten on Power8 servers. By paying GlobalFoundries to take on its chip manufacturing oblications for the next three years, it's introduced a big yellow flag into the field of vision of any other cloud providers considering the same option. It's got a money-losing operation off the books three years sooner than it might have otherwise, but it also wounded the future prospects of its architecture. Builders of 300,000-server cloud centers hate uncertainty. 
D. Henschen
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D. Henschen,
User Rank: Author
10/20/2014 | 3:52:18 PM
When is a "sale" not a sale
It was very strange to hear IBM describe this deal as the "sale" of its chip-manufacturing buisness. IBM had to pay GlobalFoundries because the latter is guaranteeing availability of chips while IBM may not be able to offer much assurance that demand for those chips will hold up.

The Power server line, in particular, has been hard hit, partly because Z system mainframes in recent years have added the ability to emulate the Power enviornment and consolidate those data-processing workloads. That's like robbing Peter to pay Paul, and I'm guessing it hasn't been a move that has won universal support within IBM.
Thomas Claburn
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Thomas Claburn,
User Rank: Author
10/20/2014 | 3:43:33 PM
Paying to be rid of a company
How often is it that companies pay to have assets taken of their hands?
D. Henschen
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D. Henschen,
User Rank: Author
10/20/2014 | 2:28:21 PM
Re: Bad Comparison
Before they stopped splitting out software revenue, Oracle revenue was still 50% database. If you add MySQL and all the BI, big data, and data-management middleware, I'd guess that's still half or more of the business.
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