Ben Mahaney, Editor

About the Author Ben Mahaney, Editor

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IBM to Restructure in Order to Focus on Cloud Computing

IBM (NYSE: IBM) is undergoing a massive structural reorganization under the leadership of CEO Ginny Rometty in order to parallel the rise in cloud computing.

The Register in the United Kingdom published a story on January 9th describing the new structure of the company, which will be divided into different departments including Cloud, Watson, and Analytics. Watson refers to IBM’s artificial intelligence system.

IBM’s restructuring will put software at the forefront of IBM while hardware takes a back seat. Rometty is quoted in an internal memo, stating “IBM software has become an essential element in every part of our company. Indeed, it is so because our software portfolio is the foundation of the world’s core business systems and powers the expanding array of cloud-based solutions we are bringing to clients.”

Plans to restructure the company have not seemed to hinder IBM’s innovation for the past year as the company received more patents in 2014 than any other company. This is the 22nd consecutive year that IBM tops the patent list with more than 7,500 patents filed under IBM in 2014.

In addition, IBM is scheduled to post fourth quarter earnings on January 20th. The company abandoned its guidance of $20 earnings per share altogether in October after shares dropped to a 52-week low. IBM’s third quarter results were disappointing, posting a 17% year-over-year decrease in net GAAP income and earnings per share losses, on both GAAP and non-GAAP bases.

On January 12, analyst David Grossman of Stifel Nicolaus maintained a Buy rating on IBM. Grossman notes several factors impacting IBM’s software business. He notes that one of the factors, a change in how IBM will sell software, is “the most meaningful but strategically necessary” factor. Grossman notes that the IBM software business is affected by a declining hardware business, but Grossman comments “Headwinds from the hardware business should abate as 2015 progresses and product issues are being addressed.” Grossman also points out cyclical demand issues within IBM and comments that these issues are “harder to predict, but comparisons get much easier in 2015, particularly in the second half.”

David Grossman has a 66% overall success rate recommending stocks and a 14.4% average return per recommendation.

Separately on January 12th, analyst James Kisner of Jefferies reiterated an Underperform rating on IBM and lowered his price target from $144 to $130. The analyst believes IBM has a “difficult transition” ahead as the company realigns itself to focus on cloud technology. Kisner commented, “We are cutting our estimates driven by a continuing strengthening of the dollar vs. almost every other major currency worldwide since IBM’s Q3 print. We continue to believe that a majority of sell-side firms misinterpreted IBM’s implied Q4 guidance and expect downward earnings revisions” in the company’s fourth quarter report. Kisner estimates that IBM will post earnings per share of $5.27 in the fourth quarter report, which is below the analyst consensus of $5.46.

James Kisner has a 63% overall success rate recommending stocks with a 2.4% average return per recommendation.

On average, the top analyst consensus for IBM on TipRanks is Hold.

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