IBM to spin off its managed infrastructure unit to focus on Red Hat, hybrid cloud; sees Q3 sales ahead of estimates

IBM will become a company that gets more than half of its sales from recurring revenue instead of services.

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IBM said it will spin off its managed infrastructure services unit into a new public company so it can focus on its hybrid cloud business, which includes Red Hat.

The new company, which will be tax free to shareholders, will focus on managing data centers and cloud infrastructure for clients.

IBM also said it will report third quarter sales results better than expectations. IBM said it will report non-GAAP third quarter earnings of $2.58 a share on revenue of $17.6 billion. Wall Street was looking for non-GAAP third quarter earnings of $2.58 a share on revenue of $17.54 billion. IBM shares were up 10% on the news.

There will be a lot of details to be worked out as the deal isn't closing until the end of 2021, but at a high-level IBM's plan looks like this:

  • Managed Infrastructure Services, which resides in IBM's Global Technology Services division, will be spun off tax-free.
  • The new company will design, run and modernize infrastructure for clients.
  • IBM will focus on its cloud platform led by Red Hat as well as growth markets like artificial intelligence and hybrid cloud.
  • Big Blue said it will streamline its operating model, consolidate shared services and simplify without managed infrastructure services.
  • When the managed infrastructure company is spun off, IBM will transition from being a company with half its revenue in services to one with more than 50% of sales from recurring revenue.

Arvind Krishna, CEO of IBM, said "client buying needs for application and infrastructure services are diverging, while adoption of our hybrid cloud platform is accelerating."

On a conference call, Krishna said the spin-off redefines IBM. "I am focused on prioritizing growth and winning the architectural battle in cloud with Red Hat," he said. "Our actions will accelerate our hybrid cloud growth strategy." 

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Krishna said that the foundation is in place for future growth at IBM. He added that customers are buying technology on different cycles with new decisionmakers relative to managed infrastructure.

"We are creating two companies focused on what they do best," said Krishna. "We will create value through focus."

IBM will have about $59 billion in revenue after the spin-off with the new company will deliver $19 billion in sales. 

Ultimately, IBM is spinning off the managed infrastructure company so it can become more of a platform company with the economics that go with it. 

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The new company details

The spin-off, which has yet to be named, will have more than 4,600 highly regulated customers in 115 countries. The new company also has 90,000 employees.

IBM said the managed infrastructure unit will have more than 75% of the Fortune 100 as customers and a backlog of $60 billion.

According to IBM, the managed infrastructure unit will be able to move more quickly to modernize infrastructure as well as partner with all cloud providers. The new company will also be a partner of IBM going forward.

Once the spin-off is complete, the two companies' combined will pay a dividend that is no less than what IBM shareholders currently receive. Here's what IBM and the new company will look like after the spin-off. 

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