On March 27th, IBM posted an article to the company’s investor website that discussed select changes made to its management system and organization structure that brought cloud and cognitive software under one organization, to more effectively address evolving client needs and prepare for the acquisition of Red Hat. With these changes, the company has updated its reportable segments. There is no change to IBM’s consolidated results.
The company will implement the new segment structure starting with first quarter 2019 results, which will be reported in mid-April. Today, the company is providing a view of the segment results on the new basis for the last 2 years, to allow investors to update their historical financial models in advance of the first quarter earnings report. The attached exhibits provide data for 2017 and 2018 under the new segment structure.
A description of the segment reporting changes was provided in the March 27th article. For reference, the article is attached below, and also available on IBM’s investor website.
March 27, 2019
IBM is addressing the evolving needs of its clients, while supporting their most mission-critical business processes. The journey to cloud and AI for these processes requires hybrid cloud, which is inclusive of private and public clouds, and addresses regulatory requirements, data localization, security, and latency. But to become true digital enterprises, clients also need to unlock the value of their data. And so today, it is important for clients to have data and cloud platforms working together to bring their enterprises into the future. Over the last year, Ginni Rometty and IBM’s senior leadership have discussed this shift to a digital era centered around hybrid and multi-cloud, underpinned by trust and security.
As IBM prepares clients for the next chapter of digital reinvention, the company has made select changes to its management system and organization structure, bringing together cloud and cognitive software under one organization to more effectively address these evolving clients’ needs, and in preparation for the acquisition of Red Hat. This better aligns IBM’s portfolio to the market and to underlying business and operating models, reflecting the way the company now manages the business and allocates resources. With these recent changes, IBM is updating its reportable segments in the first quarter of 2019. This change to segment reporting does not impact IBM’s consolidated results.
As IBM helps clients with their journeys to cloud and AI, it leverages both innovative products and the services and expertise to implement those technologies, through an integrated model. In 2019, the company will report revenue and pre-tax income, along with external gross profit for five segments: Cloud and Cognitive Software, Global Business Services, Global Technology Services, Systems, and Global Financing. The company will also continue to report revenue for cloud and cloud as-a-Service, in total and for each segment.
The primary changes are driven by increasing requirements for tighter integration across hybrid cloud and data/AI software, and the pending acquisition of Red Hat.
In addition, the company will present the results of the announced divested businesses in an “other” category; realigning these businesses allows the company to better represent the ongoing operational performance of the reportable segments. This does not change IBM’s consolidated results.
The following table summarizes the segment changes.
The company has also evolved the management system within the Cloud and Cognitive Software segment, as it addresses the changing business environment. Within this segment the company will report revenue for 1) Cognitive Applications; 2) Cloud and Data Platforms; and 3) Transaction Processing Platforms.
Global Technology Services includes the content previously reported in Technology Services and Cloud Platforms excluding Integration Software and security services which was previously reported in Infrastructure Services. The content within Technology Support Services remains unchanged.
In summary, this update aligns IBM’s reported segments to its management system, prepares for the acquisition of Red Hat, and provides investors with additional transparency on certain elements of the business. The company will begin reporting the new segments with the first quarter 2019 results in mid-April. Two years of history will be provided ahead of IBM’s earnings release to allow investors to update their models. In addition, the company plans to host an investor briefing focusing on its long-term strategy and financial model after the closing of Red Hat later this year.