Financial terms are not being disclosed. It has been owned by GI Partners, a private equity firm based in Palo Alto, Calif.

I took a meeting with SoftLayer CEO Lance Crosby in New York last year. At the time, he said he was in town to meet with Wall Street bankers in order to explore a possible initial public offering. And, indeed, the company had made some moves that indicated it was interested in an IPO: It hired a CFO from Leap Wireless last year.

Since then, talk about SoftLayer has focused not on a possible IPO, but on a buyout. This deal has been in the rumor mill for a few months. Reuters reported in March that EMC and IBM were both interested in a deal that would value SoftLayer in the $2 billion range, though there’s at least one educated guess valuing the deal as high as $2.5 billion. (Update: Sources close to the company are describing the price as “slightly below” the $2 billion mark.)

Rackspace, a cloud outfit based in San Antonio, Texas, has also been the target of recurring buyout speculation and, in fact, one school of thought had it that IBM would buy one or the other. Rackspace shares fell by more than 2 percent in pre-market trading after the IBM news was announced.

SoftLayer has 21,000 customers and 13 data centers in the U.S., Asia and Europe.

For its part, IBM has more than 5,000 of what it calls “engagements” in its private cloud business, which is very much like a public cloud, but which is operated on the customer’s premises. Earlier this year, it also threw its weight behind OpenStack, an open-source cloud computing platform, a move seen as giving the platform a big shot of technology cred, and which allows customers to mix and match cloud vendors more easily.

Cloud services are one of IBM’s big growth bets. It reported that cloud revenue grew by 80 percent in 2012, and says it is on track to reach $7 billion in revenue derived from the cloud by 2015.

Here’s IBM’s original announcement:

IBM to Acquire SoftLayer to Accelerate Adoption of Cloud Computing in the Enterprise

IBM to Form New Cloud Services Division

ARMONK, N.Y., 4 June 2013: IBM (NYSE: IBM) today announced a definitive agreement to acquire SoftLayer Technologies, Inc., the world’s largest privately held cloud computing infrastructure provider. The acquisition will strengthen IBM’s leadership position in cloud computing and will help speed business adoption of public and private cloud solutions. Financial terms were not disclosed.

“As businesses add public cloud capabilities to their on-premise IT systems, they need enterprise-grade reliability, security and management. To address this opportunity, IBM has built a portfolio of high-value private, public and hybrid cloud offerings, as well as software-as-a-service business solutions,” said Erich Clementi, Senior Vice President, IBM Global Technology Services. “With SoftLayer, IBM will accelerate the build-out of our public cloud infrastructure to give clients the broadest choice of cloud offerings to drive business innovation.”

IBM is acquiring SoftLayer to make it easier and faster for clients around the world to incorporate cloud computing by marrying the speed and simplicity of SoftLayer’s public cloud services with the enterprise grade reliability, security and openness of the IBM SmartCloud portfolio.

SoftLayer accelerates IBM’s ability to integrate public and private clouds for its clients, with flexibility that provides deployment options that enable a faster, broader transformation for small, medium and large businesses with a range of performance and security models.

Headquartered in Dallas, Texas, SoftLayer serves approximately 21,000 customers with a global cloud infrastructure platform spanning 13 data centers in the U.S., Asia and Europe. Among its many innovative cloud infrastructure services, SoftLayer allows clients to buy enterprise-class cloud services on dedicated or shared servers, offering clients a choice of where to deploy their applications. These clients will benefit greatly as new enterprise grade functionality from IBM emerges for SoftLayer customers, who will then have a unique opportunity to incorporate it as their business grows.

“SoftLayer has a strong track record with born-on-the-cloud companies, and our move today with IBM will rapidly expand that footprint globally as well as allow us to go deep into the large enterprise market,” said Lance Crosby, CEO of SoftLayer. “The compelling opportunity is connecting IBM’s geographic reach, industry expertise and IBM’s SmartCloud breadth with our innovative technology. Together SoftLayer and IBM expand their reach to new clients – both born-on-the-cloud and born-in-the-enterprise.”

Already one of the world’s leading cloud providers, IBM expects to reach $7 billion annually in cloud revenue by the end of 2015. IBM offers more than 100 SaaS solutions to help marketing, procurement, ecommerce, customer service, human resources, city management, and other professionals make better decisions and better serve their customers. IBM also offers Watson solutions such as Client Engagement Advisor in the cloud, superior solutions such as IBM PureSystems and SmartCloud Enterprise+, as well as mission critical cloud services for SAP.

IBM is a leader with enterprise customers based on its vertical industry expertise delivered from 10 cloud computing centers on five continents. The acquisition of SoftLayer will complement IBM’s existing SmartCloud portfolio, providing enterprises with easy access to a broader range of choices that transform their workloads while continuing to innovate with SoftLayer to meet the needs of born-on-the-cloud firms.

New IBM Cloud Services Division

Recognizing the importance of cloud to global clients, IBM today is announcing the formation of a new Cloud Services division. Following the close of the acquisition of SoftLayer, which is expected in 3Q 2013, this new division will combine SoftLayer with IBM SmartCloud into a global platform. The new division will provide a broad range of choices to both IBM and SoftLayer clients, ISVs, channel partners and technology partners. SoftLayer’s services will complement the existing portfolio with its focus, simplicity and speed. The division will report to Erich Clementi, Senior Vice President, IBM Global Technology Services.

“Our clients are telling us they want to realize the transformative benefits of cloud today — not just for individual applications, but across their entire enterprise,” said Clementi. “SoftLayer is a perfect fit for IBM. It will help us smooth the transition of our global clients to the cloud faster, while enabling IBM to more efficiently offer them its broad portfolio of open IT infrastructure and software services.”

IBM intends to expand SoftLayer cloud offerings to include OpenStack capabilities, consistent with its entire SmartCloud portfolio and historic commitment to open standards such as Linux. Given that most companies will mix public and private cloud services, clouds need to interoperate. In that way, firms can better leverage cloud to run their social, mobile and Big Data applications.

IBM will also support and enrich the SoftLayer cloud-centric partners and ecosystem and its performance capabilities for Big Data and analytics. IBM will provide go-to-market and customizable resources for its expanding cloud ecosystem.

The Value of SoftLayer

Among its many innovative cloud infrastructure services, SoftLayer allows clients to buy enterprise-class cloud services on dedicated or shared servers, offering clients a choice of where to deploy their applications. By building out a cloud with IBM and SoftLayer, a client can choose the work that belongs on a dedicated or a shared computing resource — thereby tailoring the privacy, data security and overall computing performance to the client’s needs. Importantly, this level of reliability and scale is critical for cloud-centric companies.

SoftLayer provides the infrastructure for cloud-centric, performance-intensive applications in the areas of mobile, social media, gaming and analytics. The growing number of businesses incorporating mobile computing is helping drive SoftLayer growth.

· In the last two quarters, more than 60 new gaming companies have moved to the SoftLayer global platform, frequently migrating from commodity cloud platforms because of problems with cost, latency, availability and raw performance.

· SoftLayer’s architecture provides superior technical capabilities such as a software definable environment critical to a cloud infrastructure, programmable interfaces, and hundreds of hardware and network configurations. This is designed to deliver a higher level of flexibility — mixing virtual and dedicated servers to fit a variety of workloads — automation of interfaces and hybrid deployment options.

· SoftLayer’s automated networking infrastructure supports public, private and data center-to-data center architectures, and is designed to provide maximum flexibility and control for clients. The SoftLayer IT infrastructure connectivity enables connections with leading global network providers and Internet access networks.

· IBM SaaS solutions for Smarter Cities, Smarter Commerce and other applications will be made available via SoftLayer over time, providing line-of-business clients improved time to value and new innovation across an increasingly integrated portfolio of solutions that accelerate business process innovation, provide analytics at the point of impact, and connect collaborative business networks within and across organizations.

The acquisition is expected to close following customary closing conditions including regulatory clearances.

About SoftLayer
SoftLayer, whose majority shareholder is GI Partners of Menlo Park, Calif., operates a global cloud infrastructure platform built for Internet scale. Spanning 13 data centers in the United States, Asia and Europe and a global footprint of network points of presence, SoftLayer’s modular architecture provides unparalleled performance and control, with a full-featured API and sophisticated automation controlling a flexible unified platform that seamlessly spans physical and virtual devices, and a global network for secure, low-latency communications. With 100,000 devices under management, SoftLayer is the largest privately held Infrastructure-as-a-Service (IaaS) provider in the world with a portfolio of leading-edge customers from Web startups to global enterprises.

About IBM Cloud Computing
IBM has helped thousands of clients adopt cloud models and manages millions of cloud- based transactions every day. IBM assists clients in areas as diverse as banking, communications, healthcare and government to build their own clouds or securely tap into IBM cloud-based business and infrastructure services. IBM is unique in bringing together key cloud technologies, deep process knowledge, a broad portfolio of cloud solutions and a network of global delivery centers. For more information about cloud offerings from IBM, visit http://www.ibm.com/smartcloud. Follow us on Twitter at http://www.twitter.com/ibmcloud and on our blog at http://www.thoughtsoncloud.com.

This one doesn’t sound at first quite as interesting, but from the point of view of complex computing tasks, it’s pretty cool. When you think about all the ways that companies have to try to engage with and then make their customers happy and the ways they can do that more effectively, you can probably imagine how a deeply analytical computer might be useful.

IBM calls it the Watson Engagement Advisor; it’s an offshoot its Smarter Commerce initiative. Consider that Watson is smart enough to understand the natural ebb and flow of human language and is designed to answer questions in much the same way humans do, and then quickly sort through a set of known information to determine the best answer, and you’ll realize it’s a fit for customer service.

In that way, Watson can learn over time, and like a good bartender with a lot of regulars, keep track of the unique likes and dislikes of customers and get better at it over time. And that’s important as consumers come to expect to be able to interact with companies pretty much wherever they are and on whatever device they happen to be using at the time: Whether it’s a smart phone, tablet, PC or whatever, they will expect — already are expecting — consistent experiences. Consumers, especially the younger ones, will expect companies to shift with the marketplace as tastes change and evolve.

Watson can be the voice that customers hear when they reach out to the company asking questions. Watson has only gotten smarter since its run on “Jeopardy,” speeding up its performance by 240 percent while slimming down the size of the system required to run it by 75 percent. Already the Nielsen Company and the Royal Bank of Canada are among those kicking the tires in trials.

It lasts all of 60 seconds, and depicts a boy — made up of individual atoms himself — encountering a single atom that he befriends and throws like a ball. He then bounces up and down on a tiny trampoline made up of atoms, then throws the original atom into the sky, where it erupts into a tiny commercial for the company that produced it: IBM.

What’s going on here is this: Scientists at IBM’s Almaden Research Lab in San Jose, Calif., have figured out a way to precisely move and manipulate individual atoms. To do it they’re using a big piece of equipment called a scanning tunneling microscope that weighs two tons and operates at a temperature of minus 268 degrees Celsius (or 450.5 degrees below zero on the Fahrenheit scale, according to the Unit Convert widget on my Mac). In the world of physics and nanotechnology, this thing is a big deal and led the two IBM inventors to share the Nobel Prize for Physics in 1986. (Here’s a video history about it.)

Using a computer, researchers used a tiny needle that moved along a surface of a postage-stamp sized bit of copper. The needle would draw within one nanometer (a billionth of a meter) of the individual atoms and thus “feel” them so it could then move them into place and shift them around frame by frame in order to make the stop-motion action happen. The film you’re about to see is made up of 242 such frames using not one but two of those scanning tunneling microscopes. The atoms have been magnified about 100 million times from their original size.

Before they tried animation, and in the tradition of humorous art that sometimes appears on the surface of individual computer chips, the folks at IBM experimented with illustrations made of atoms. Among them was a rendering of the Starship Enterprise from “Star Trek” that’s not much more than a single nanometer tall. (Pictured at right; click the image to make it bigger.) Before that, way back in 1989, the big brains at Big Blue were able to spell out the company name using 35 individual atoms of xenon.

So why is IBM using atoms to make crude animations? As has long been the case, everything inside computers is getting smaller all the time. According to Moore’s law — named for Intel co-founder Gordon Moore — individual transistors on chips tend to shrink every 18 to 24 months. So does the amount of space needed to store individual bits of data. Right now, IBM says, it takes about a million atoms to do that, but it can see a trajectory leading to a point in the future to where that number can be reduced to 12 atoms. At that scale, the media to store information will be so compact that every movie ever made, including “A Boy And His Atom,” could be stored on a device the size of your iPhone. That means the ability to move and manipulate individual atoms with great precision will eventually come in handy.

“Steamboat Willie” it’s not, but here for the first time on public display, is IBM’s “A Boy And His Atom.”

And here is the obligatory “Making Of …” video that explains how and why the movie was made, including an interesting detail: What moving individual atoms sounds like.

UrbanCode’s play is to speed up the development and delivery of software. Big Blue says it will be integrated into its SmartCloud and MobileFirst offerings. UrbanCode’s technology, IBM said, helps businesses cut down the time between updates to applications.

The deal is IBM’s second of 2013. In a note to clients, ISI analyst Brian Marshall estimated that the company has spent about $12 billion on small tuck-in acquisitions during the last three years. Word of the deal comes a week after IBM reported a disappointing quarterly earnings miss that was interpreted as a bad sign for the rest of the IT industry.

After reporting profits that at least met Wall Street’s expectations for 31 straight quarters dating back through the financial crisis to early 2005, IBM stumbled late Thursday.

Read the rest of this post on the original site »

That’s the conclusion of Chris Whitmore, an analyst with Deutsche Bank Securities, in the wake of yesterday’s earnings report. “IBM hasn’t missed consensus earnings expectations for eight years which raises the specter of increased macro risk and substantially weaker IT hardware spending,” he wrote in a note to clients today.

IBM is better than most at managing sales that turn south in one part of its business, but still able to make its numbers, he writes. That it wasn’t able to do so this quarter “raises a red flag” for other tech companies, especially those that sell a lot of hardware, including Hewlett-Packard, Dell, NetApp and EMC. “The IBM miss is a decidedly negative read through for the entire IT hardware segment and we are incrementally more cautious on the sector,” Whitmore wrote.

Expect a lot of attention on IT spending trends in the coming weeks, as other large IT companies get ready to report their results. The next big indicator will be when EMC reports quarterly results next week. HP, Dell and NetApp all report results in mid-May.

Earnings on a per-share basis were $3.00 on sales of $23.4 billion, well below the consensus view of analysts who had forecast $3.05 on sales of $24.7 billion.

IBM shares fell by nearly 4 percent in after-hours trading. The results will likely weigh on the broader markets tomorrow.

The weakness appears to be similar to something Oracle said about its most recently reported quarter. In the statement below, CEO Ginni Rometty said several deals that would have otherwise closed in the first quarter both in hardware and software slid into the second quarter.

Here’s another reason for the miss: Global Technology Services revenue at $9.6 billion fell by 4 percent year on year, or 2 percent after adjusting for currency fluctuations. Global Business Services, at $4.5 billion, fell 3 percent, or were flat after adjusting for currency effects.

Sales were off in every geographical region: By 7 percent in the Asia Pacific region, and by 4 percent each in the Americas and in Europe-Middle East-Africa.

There were bright spots. Software segment sales were flat at $5.6 billion, or up 1 percent after adjusting for currency versus the year-ago quarter. I guess flat is the new up.

Even so, IBM hasn’t seen fit to adjust its full-year guidance, which calls for per-share earnings of $16.70.

Either way, that’s a pretty substantial miss on both the EPS and revenue lines. It’s rare for IBM to come in with revenue that’s more than a billion dollars off the consensus.

Here’s IBM’s announcement. I’ll have more as I go through it. The company is going to discuss the results on a conference call shortly.

IBM Reports 2013 First-Quarter Results
ARMONK, N.Y.–(BUSINESS WIRE)–
IBM (IBM)
Diluted EPS: GAAP: $2.70, up 3 percent;

Operating (non-GAAP): $3.00, up 8 percent;

Net income: GAAP: $3.0 billion, down 1 percent;

Operating (non-GAAP): $3.4 billion, up 3 percent;

Gross profit margin: GAAP: 45.6 percent, up 0.6 points;

Operating (non-GAAP): 46.7 percent, up 1.0 points;
Revenue: $23.4 billion, down 5 percent, down 3 percent adjusting for currency;

Free cash flow of $1.7 billion, down $0.2 billion;

Software revenue flat, up 1 percent adjusting for currency;

Pre-tax: income up 4 percent; margin up 1.2 points;

Services revenue down 4 percent, down 1 percent adjusting for currency;

Pre-tax: income up 10 percent; margin up 2.0 points;
Services backlog of $141 billion, up 1 percent, up 5 percent adjusting for currency;

Closed 22 deals of more than $100 million in the quarter;

Systems and Technology revenue down 17 percent, down 16 percent adjusting for currency;

Growth markets revenue down 1 percent, up 1 percent adjusting for currency;

Business analytics revenue up 7 percent;

Smarter Planet revenue up more than 25 percent;

Cloud revenue up more than 70 percent;

Reiterating full-year 2013 operating (non-GAAP) EPS expectation of at least $16.70.
IBM (IBM) today announced first-quarter 2013 diluted earnings of $2.70 per share, a year-to-year increase of 3 percent. Operating (non-GAAP) diluted earnings were $3.00 per share, compared with operating diluted earnings of $2.78 per share in the first quarter of 2012, an increase of 8 percent.

First-quarter net income was $3.0 billion, down 1 percent year-to-year. Operating (non-GAAP) net income was $3.4 billion compared with $3.3 billion in the first quarter of 2012, an increase of 3 percent.

Total revenues for the first quarter of 2013 of $23.4 billion were down 5 percent (down 3 percent, adjusting for currency) from the first quarter of 2012.

“In the first quarter, we grew operating net income, earnings per share and expanded operating margins but we did not achieve all of our goals in the period. Despite a solid start and good client demand we did not close a number of software and mainframe transactions that have moved into the second quarter. The services business performed as expected with strong profit growth and significant new business in the quarter,” said Ginni Rometty, IBM chairman, president and chief executive officer.

“Looking ahead, in addition to closing those transactions, we expect to benefit from investments we are making in our growth initiatives and from the actions we are taking to improve under-performing parts of the business. We remain confident in this model of continuous transformation and in our ability to deliver our full-year 2013 operating earnings per share expectation of at least $16.70.”

First-Quarter GAAP – Operating (non-GAAP) Reconciliation

First-quarter operating (non-GAAP) diluted earnings exclude $0.30 per share of charges: $0.12 per share for the amortization of purchased intangible assets and other acquisition-related charges, and $0.18 per share for retirement-related charges.
Full-Year 2013 Expectations

IBM is reiterating its expectation for full-year 2013 GAAP diluted earnings per share of at least $15.53. Operating (non-GAAP) diluted earnings per share expectations remain at least $16.70. The 2013 operating (non-GAAP) earnings expectations exclude $1.17 per share of charges for amortization of purchased intangible assets, other acquisition-related charges, and retirement-related charges.

Geographic Regions

The Americas’ first-quarter revenues were $10.0 billion, a decrease of 4 percent (down 3 percent, adjusting for currency) from the 2012 period. Revenues from Europe/Middle East/Africa were $7.3 billion, down 4 percent (down 4 percent, adjusting for currency). Asia-Pacific revenues decreased 7 percent (down 1 percent, adjusting for currency) to $5.7 billion.

OEM revenues were $426 million, down 16 percent compared with the 2012 first quarter.
Growth Markets

Revenues from the company’s growth markets decreased 1 percent (up 1 percent, adjusting for currency). Revenues in the BRIC countries — Brazil, Russia, India and China — decreased 1 percent (up 3 percent, adjusting for currency).

Services

Global Technology Services segment revenues decreased 4 percent (down 2 percent, adjusting for currency) to $9.6 billion. Global Business Services segment revenues were down 3 percent (flat, adjusting for currency) to $4.5 billion.

Pre-tax income from Global Technology Services was up 7 percent and pre-tax margin increased to 16.1 percent. Global Business Services pre-tax income increased 17 percent and pre-tax margin increased to 15.1 percent.

The estimated services backlog at March 31 was $141 billion, up 1 percent year over year at actual rates (up 5 percent, adjusting for currency). The company closed 22 service agreements of more than $100 million in the quarter.

Software

Revenues from the Software segment were flat at $5.6 billion (up 1 percent, adjusting for currency) compared with the first quarter of 2012. Software pre-tax income increased 4 percent and pre-tax margin increased to 31.5 percent.

Revenues from IBM’s key middleware products, which include WebSphere, Information Management, Tivoli, Social Workforce Solutions (formerly Lotus) and Rational products, were $3.5 billion, up 1 percent (up 2 percent, adjusting for currency) versus the first quarter of 2012. Operating systems revenues of $578 million were down 2 percent (down 1 percent, adjusting for currency) compared with the prior-year quarter.

Revenues from the WebSphere family of software products increased 6 percent year over year. Information Management software revenues decreased 2 percent. Revenues from Tivoli software increased 1 percent. Revenues from Social Workforce Solutions (formerly Lotus) software increased 8 percent, and Rational software decreased 2 percent.

Hardware

Revenues from the Systems and Technology segment totaled $3.1 billion for the quarter, down 17 percent (down 16 percent, adjusting for currency) from the first quarter of 2012. Excluding Retail Store Solutions (RSS), revenues were down 14 percent (down 13 percent, adjusting for currency). Systems and Technology pre-tax loss increased $0.3 billion.

Total systems revenues, excluding RSS, decreased 13 percent (down 13 percent, adjusting for currency). Revenues from System z mainframe server products increased 7 percent compared with the year-ago period. Total delivery of System z computing power, as measured in MIPS (millions of instructions per second), increased 27 percent. Revenues from Power Systems were down 32 percent compared with the 2012 period. Revenues from System x were down 9 percent. Revenues from System Storage decreased 11 percent. Revenues from Microelectronics OEM decreased 16 percent.

Financing

Global Financing segment revenues were up 2 percent (up 4 percent, adjusting for currency) in the first quarter at $499 million. Pre-tax income for the segment increased 5 percent to $538 million.

Gross Profit

The company’s total gross profit margin was 45.6 percent in the 2013 first quarter compared with 45.1 percent in the 2012 first-quarter period. Total operating (non-GAAP) gross profit margin was 46.7 percent in the 2013 first quarter compared with 45.7 percent in the 2012 first-quarter period, with increases in Global Technology Services and Global Business Services.

Expense

Total expense and other income decreased 3 percent to $7.1 billion, compared to the prior-year period. S,G&A expense of $5.6 billion decreased 5 percent year over year. R,D&E expense of $1.6 billion increased 3 percent, compared with the year-ago period. Intellectual property and custom development income decreased to $183 million compared with $255 million a year ago. Other (income) and expense was income of $60 million compared with prior-year income of $58 million. Interest expense decreased to $94 million compared with $110 million in the prior year.

Total operating (non-GAAP) expense and other income decreased 4 percent to $6.9 billion compared with the prior-year period. Operating (non-GAAP) S,G&A expense of $5.4 billion decreased 7 percent compared with prior-year expense. Operating (non-GAAP) R,D&E expense of $1.6 billion increased 1 percent compared with the year-ago period.
* * *
Pre-tax income decreased 6 percent to $3.6 billion. Pre-tax margin decreased 0.1 points to 15.4 percent. Operating (non-GAAP) pre-tax income decreased 1 percent to $4.1 billion and pre-tax margin was 17.4 percent, up 0.8 points.

IBM’s tax rate was 15.9 percent, down 4.1 points year over year; operating (non-GAAP) tax rate was 17.3 percent, down 3.2 points compared to the year-ago period. The lower tax rate is primarily due to benefits recorded to reflect changes in tax laws enacted during the quarter, including the reinstatement of the U.S. Research and Development Tax Credit.

Net income margin increased 0.5 points to 13.0 percent. Total operating (non-GAAP) net income margin increased 1.2 points to 14.4 percent.

The weighted-average number of diluted common shares outstanding in the first-quarter 2013 was 1.12 billion compared with 1.17 billion shares in the same period of 2012. As of March 31, 2013, there were 1.11 billion basic common shares outstanding.

Debt, including Global Financing, totaled $33.4 billion, compared with $33.3 billion at year-end 2012. From a management segment view, Global Financing debt totaled $25.2 billion versus $24.5 billion at year-end 2012, resulting in a debt-to-equity ratio of 7.2 to 1. Non-global financing debt totaled $8.2 billion, a decrease of $0.6 billion since year-end 2012, resulting in a debt-to-capitalization ratio of 34.3 percent from 36.1 percent.

IBM ended the first-quarter 2013 with $12.0 billion of cash on hand and generated free cash flow of $1.7 billion, excluding Global Financing receivables, down approximately $0.2 billion year over year. The company returned $3.5 billion to shareholders through $0.9 billion in dividends and $2.6 billion of gross share repurchases. The balance sheet remains strong, and the company is well positioned to support the business over the long term.
Forward-Looking and Cautionary Statements

Except for the historical information and discussions contained herein, statements contained in this release may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based on the company’s current assumptions regarding future business and financial performance. These statements involve a number of risks, uncertainties and other factors that could cause actual results to differ materially, including the following: a downturn in economic environment and corporate IT spending budgets; the company’s failure to meet growth and productivity objectives, a failure of the company’s innovation initiatives; risks from investing in growth opportunities; failure of the company’s intellectual property portfolio to prevent competitive offerings and the failure of the company to obtain necessary licenses; cybersecurity and data privacy considerations; fluctuations in financial results and purchases, impact of local legal, economic, political and health conditions; adverse effects from environmental matters, tax matters and the company’s pension plans; ineffective internal controls; the company’s use of accounting estimates; the company’s ability to attract and retain key personnel and its reliance on critical skills; impacts of relationships with critical suppliers and business with government clients; currency fluctuations and customer financing risks; impact of changes in market liquidity conditions and customer credit risk on receivables; reliance on third party distribution channels; the company’s ability to successfully manage acquisitions and alliances; risk factors related to IBM securities; and other risks, uncertainties and factors discussed in the company’s Form 10-Q, Form 10-K and in the company’s other filings with the U.S. Securities and Exchange Commission (SEC) or in materials incorporated therein by reference. Any forward-looking statement in this release speaks only as of the date on which it is made. The company assumes no obligation to update or revise any forward-looking statements.

Presentation of Information in this Press Release

In an effort to provide investors with additional information regarding the company’s results as determined by generally accepted accounting principles (GAAP), the company has also disclosed in this press release the following non-GAAP information which management believes provides useful information to investors:
IBM results and expectations –
-presenting operating (non-GAAP) earnings per share amounts and related income statement items;

-presenting non-global financing debt-to-capitalization ratio;

-adjusting for free cash flow;

-adjusting for currency (i.e., at constant currency);

-adjusting for the divestiture of RSS.

The rationale for management’s use of non-GAAP measures is included as part of the supplemental materials presented within the first-quarter earnings materials. These materials are available via a link on the IBM investor relations Web site at www.ibm.com/investor and are being included in Attachment II (“Non-GAAP Supplemental Materials”) to the Form 8-K that includes this press release and is being submitted today to the SEC.

Conference Call and Webcast

IBM’s regular quarterly earnings conference call is scheduled to begin at 4:30 p.m. EDT, today. The Webcast may be accessed via a link at http://www.ibm.com/investor/events/1q13.phtml. Presentation charts will be available shortly before the Webcast.

The consensus view of analysts says that Big Blue will report earnings per share of $3.05 on sales of $24.7 billion, and guide to profits of $3.95 a share on $26.2 billion in the quarter ending in June.

Chris Whitmore, an analyst with Deutsche Bank Securities, said in a note to clients earlier this week that he expects IBM’s sales to come in a little short of that consensus, but with a slightly higher EPS, driven in part by currency-hedging moves intended to take the sting off the effects from the contraction of credit and government austerity measures in Europe.

Whitmore says to expect solid results in IT hardware on the heels of a recent refresh cycle in IBM’s mainframe business. But with only two significant deals announced during the quarter, services results could be light. Ongoing cost-cutting measures, plus a shift toward selling more high-margin software, could boost gross margins to as high as 46.8 percent, up from 45.7 percent in the year-ago quarter. “In aggregate, we believe IBM’s high degree of recurring revs (about 60 percent of profits) and continued cost reduction and operational efficiency initiatives should support healthy margins and solid EPS going forward,” Whitmore wrote. He thinks it’s possible that IBM’s forecast that it will earn $16.70 a share in 2013 may prove a little conservative, and could go as high as $17.

On the hardware front, Whitmore says to pay attention to what IBM executives say about Unix servers in the conference call later today. While Oracle has recently announced a new line of servers based on its SPARC line of chips, and has made some bold claims about their performance, he says the industry contacts he talks to aren’t terribly impressed. “Based on our initial review of the product (and feedback from industry contacts), these new product announcements from Oracle mark a significant step up in the performance of its server products, but do not seem significant enough to change the ongoing competitive dynamics in the industry. As such, we expect IBM’s share gains in the Unix server market to continue. We believe investors will be acutely focused on management commentary on this front.”

As it happens, Rometty’s company, IBM, has a pretty close relationship with Augusta National and the tournament. And if you’re into golf but don’t have the time to watch every minute — and who does? — IBM has made it easy to keep track of it all with a pretty immersive experience, on smartphone, iPad or Web.

Naturally there are a lot of HD video highlights across all three. And on the iPad there’s a lot of exclusive coverage from CBS and ESPN. There’s also a live leaderboard that is intended to mirror exactly what you’d see on the course.

But it’s the iPad app with the feature that everyone will remark on. There’s an impressive 360-degree panoramic view of different spots on the course that takes advantage of the device’s gyroscope capability. Turn it around and you can better understand from the point of view of the player you happen to be watching on TV at that moment the degree of difficulty of the shot he’s trying to make.

But there’s a lot more going on behind the scenes. I had a quick chat earlier this week with IBM’s John Kent, a program manager who leads Big Blue’s many sports sponsorship efforts. The Masters serves as a bit of a demo bed to show what IBM can do.

Sporting occasions like the Masters are by nature unpredictable. A sudden event can generate a sudden burst of activity and interest, and quickly overwhelm unprepared infrastructure. Kent said that IBM had been using its own private cloud technology to adapt to that demand as needed. “We can provision new servers within three minutes if we need to or move workloads to realign capacity; we can move it all around uninterrupted and keep things going,” he told me.

Another new feature this year is IBM’s favorite word: Analytics. IBM’s cloud can predict, based on many different factors, when more people may be checking in on the Web, their iPads or phones, and dynamically provision resources. “It used to be we would project for ourselves, using a spreadsheet, when we’d see our peak traffic,” Kent said. “If there’s a lot of drama, and it can shift pretty suddenly, it drives a lot of viewers. We’re ready to respond right away.”

Big Blue announced today that all of its cloud services and software will be based on an open cloud architecture. It’s good news for potential IBM customers because it means they can mix and match service and equipment vendors — Dell, Hewlett-Packard and Rackspace are also big OpenStack fans — without worrying about getting stuck with one.

Its first move will be to spin up a private cloud service based on OpenStack. There’s also some new software, specifically something called IBM SmartCloud Monitoring Application Insight, that’s aimed at monitoring the progress and availability of cloud applications. There are also two other applications coming out, but they’re in beta.

While IBM isn’t the biggest player in the area of cloud services — right now, it’s Amazon’s Web Services — it has been gearing up for a big push into the business, sensing an opportunity. And there is an opportunity: Gartner says the market for cloud services this year will total $131 billion. And while there will certainly be some purists who sniff that “private clouds” aren’t real clouds, the fact is that IBM has about 5,000 customers running their own clouds, or in a mixed public-private environment. These hybrid cloud arrangements are something IBM has been talking about for a few years now.

Looking back in history, it appears that this sort of backing by IBM can have a significant effect. In 2000, Big Blue backed Linux, the open source operating system, as a critical piece of its systems business. A year later, it invested $1 billion in the Linux movement. IBM’s seal of approval over time helped Linux gain acceptance and credibility in big businesses.

For the cloud, it will help nudge the industry toward an accepted standard. A Booz & Company study found that efforts to set standards and craft a working set of best practices for cloud computing has been, at best, fragmented. In its current state, the study argues, with numerous inconsistent and incompatible standards, cloud services won’t evolve, and companies won’t get the benefits they need.

“Everyone is talking about the cloud, but in order for it to have real scale and impact, it’s pretty clear that standards and open source are going to be pretty important,” says Angel Diaz, IBM’s vice president for software standards, open source and high-performance computing. “Without standards, the cloud is going to be complex, not simple, and clients will be stuck with one vendor.”

Ann Winblad, a venture capitalist and a managing director of Hummer Winblad Venture Partners, a firm that has had a long-term investment interest in open source software and open standards, and has backed companies like Plumgrid and Sonatype, says that OpenStack has essentially become the operating system for the cloud. “I think the trend here is that OpenStack has won the race to become the standard, and it has done it rapidly,” Winblad said. “We’ve made some investments around the software-defined data center, and OpenStack is a key component. It is the OS for the cloud.”

A few other things IBM is doing: It has created a 400-member customer council devoted to cloud standards. The council initially started with only 40 members. It’s also backing the OpenStack Foundation as a platinum member, and contributing a lot of code to OpenStack projects. And it is backing other OpenStack-related standards, like one called Open Service for Lifecycle Collaboration which aims to make it easier to manage software over time, and to use multiple tools for the job together.

That was a point that IBM CEO Ginni Rometty made today in remarks at the company’s investors day in San Jose, Calif. IBM is known for making numerous acquisitions over the years, a recent example being StoredIQ.

What does IBM look for in an acquisition? Rometty boiled it down to three questions the company asks before every deal: “Does it extend a capability we have? Does it have scalable intellectual property? Can we extend it to 173 countries around the world?”

In a perhaps not-so-veiled shot at rival Hewlett-Packard, given its combined $16 billion in write-downs on the acquisitions of EDS and Autonomy last year, Rometty said IBM feels strongly that “companies get in trouble when they acquire something that takes them into a new space.”

But just as important to Big Blue’s success in recent years has been its decisions to get out of certain businesses. Examples include the PC business, which it sold to Lenovo in 2004, and, more recently, its retail point-of-sale business, which it sold to Japan’s Toshiba last year.

“Over the last decade, we have divested $15 billion worth of revenue,” Rometty said. “If we had not, we would be a larger company, but we would also be a lesser-margin company, and we would have capabilities that our clients would be less interested in.”

Rometty also said that IBM expects to continue its big bets on technologies like Big Data and analytics. “Data will be the basis of competitive advantage for every company, for every industry in the coming decade.”

To that end, she said that IBM now expects revenue from business analytics to account for as much as $20 billion in annual revenue by fiscal 2015. The prior target was $16 billion. And if Big Blue hits that goal it would amount to a doubling of analytics revenue from 2010.

Big Blue took a serious plunge into the mobile business today by teaming up with AT&T, launching new services for its clients and making it easier for its customers to develop software for mobile platforms. The initiative has been dubbed MobileFirst, and brings what IBM does best, including analytics, application development and cloud services, into a batch of services that make it easier for customers manage and secure the devices that employees use on the job, and to more easily develop applications they use to reach out to their own customers.

It’s a strong signal about IBM’s priorities going forward that, among other things, could indicate a preference for making acquisitions of companies in the mobile space in the future: It has already bought 10 mobile companies in the last four years. Prior strategic bets like this include Web commerce and data analytics. It’s also something IBM has been quietly doing for some time: It said it has already helped 1,000 companies get their mobile act together.

As for AT&T, the two are now partners on the mobile software development front. AT&T uses IBM’s Worklight mobile application development platform — Worklight was one of those 10 mobile acquisitions — to access AT&T APIs in the cloud, speeding up development of apps. Expect IBM to say more about this at the Mobile World Congress in Barcelona next week.

Chris Whitmore of Deutsche Bank Securities expects the quarter’s results to be in line with those expectations, but not without headwinds. Hardware sales should be solid, and should grow about 1 percent year on year, he wrote in a note to clients issued this morning, primarily on the strength of a recent refresh in mainframe machines, Power7 servers and IBM’s newer Pure Systems line.

Software sales should be a mixed bag. With a “choppy” macroeconomic picture as a backdrop, sales of new software licenses may be uncertain. However, IBM’s main software business units, including Tivoli group, WebSphere and storage management software, are all likely to report healthy growth. He expects software sales overall to show growth of 4.5 percent.

The biggest worry about IBM going into today’s earnings report will be around services. The company announced only two large deals during the quarter, fewer than in recent quarters, and none of them had values announced along with them. “IBM’s services bookings figure remains a wildcard this quarter,” Whitmore wrote. He pegs revenue from services at $21 billion.

Another worry will be the currency effect. IBM does business all over the world, and when it gets paid in non-U.S. currencies, the strong U.S. dollar erodes the value of some of those payments.

IBM’s gross margins, a key metric indicating profitability, will be an important number to watch. Whitmore expects a gross margin of 51.4 percent, up from 50.2 percent a year ago, and operating margins of 26 percent, up from 24.5 percent in the year-ago period. Efforts by IBM to reduce its costs, and shifts toward new hardware and software products, will help keep margins growing.

The other long-term item to watch is any indication that IBM may miss its goal to report $20 billion in new revenue and $20 in annual per-share earnings by 2015. Whitmore says Big Blue is still on track and will demonstrate that in its guidance. He expects IBM to project sales growth of about 10 percent, which would imply annual earnings this year in the range of $16.60 to $16.65 per share.

IBM said today that it was granted 6,478 patents in 2012, which is also a record. The company has about 8,000 researchers and inventors working in 46 states in the U.S. and 35 countries around the world. The full tally of patents over 20 years amounts to nearly 67,000.

The next nine companies in the Top 10 list of patent recipients are:

• Samsung, which received 5,081 patents
• Canon: 3,174
• Sony: 3,032
• Panasonic: 2,769
• Microsoft: 2,613
• Toshiba: 2,447
• Hon Hai : 2,013
• General Electric: 1,652
• LG Electronics: 1,624

So what does IBM do that other companies don’t? I had a quick conversation with Katherine Frase, IBM’s VP for Industry Solutions and Emerging Business. “The process of getting to so many patents means that inside the company there’s a mindset that’s geared toward writing down what you do when do something that’s original and that has business value. There’s a tangible focus on writing things down. And you’ll write down five to 10 times the number of things that actually pass muster toward getting a patent. But that process keeps the notion of innovation at the front of your mind, not at the back of the mind,” she says. “It shows up in patents, and that’s an indicator, but the cultural assumption that innovation isn’t an accident but is made up of lots of little things that you remembered to capture along the way is more important than the patents themselves.”

So, what sorts of things did IBM receive patents for in 2012? Here’s a sampling:

U.S. Patent #8,275,803: System and method for providing answers to questions. Remember Watson? The talking supercomputer that cleaned humanity’s clock on the TV game show “Jeopardy,” and then followed it up by going to medical school and becoming a big-shot doctor working on treating cancer? This would be the patent on how Watson takes in questions expressed in natural language and returns an answer.

U.S. Patent #8,250,010: Electronic learning synapse with spike-timing dependent plasticity using unipolar memory-switching elements. If Watson weren’t enough for you at mimicking and improving upon humanity, IBM is working on something even more complex: Systems of Neuromorphic Adaptive Plastic Scalable Electronics, or SyNAPSE. It’s a project focused on cognitive computing aimed at emulating the workings of the human brain.

U.S. Patent #8,185,480: System and method for optimizing pattern recognition of non-Gaussian parameters. I don’t have the slightest idea what a non-Gaussian parameter is, so I’m not going to even try to explain this one, beyond saying that it has to do with recognizing patterns in data as the volume of information grows. One example IBM gives is traffic data: If you’re measuring traffic patterns, every day you get more data, and thus the patterns change and evolve, or existing ones become more pronounced and predictable.

There are 6,475 more or these patents from 2012 and, no, I won’t even try to list any more. Here’s a short video that IBM produced on the subject:

Last year, you may remember, Big Blue agreed to a $10 million fine to the SEC to settle a civil lawsuit charging that it paid bribes to government officials in China and South Korea during a period from 1998 to 2009.

Now the judge reviewing the settlement is demanding some onerous reporting requirements that the company says are too burdensome, according to a Bloomberg report. And the SEC is taking its side.

Judge Richard Leon (pictured from his Wikipedia bio), who has been reviewing the case for 22 months, says he wants IBM to report on a significantly wider range of issues, some of which aren’t connected to the substance of the original bribery complaint against it.

Most of the time, judges sign off on these settlements. Companies come clean and agree to show that they’re staying clean by not doing what they’ve been accused of. But apparently Leon’s blood is up over this. He has told IBM that he wants annual reports on its compliance with the Foreign Corrupt Practices Act, the law that governs bribery overseas, and he wants the reports to cite all potential accounting violations. IBM has so far agreed only to report on matters related to bribery, which is what the original complaint is about. The next hearing is set for Feb 4.

In the original complaint, the SEC said that IBM made payments to “secure the sale of IBM products through IBM-Korea and LG-IBM’s business partners,” referring to IBM units in South Korea and China. IBM was accused of paying $207,000 in bribes to South Korean officials, including cash, gifts, travel and entertainment expenses and free computers.

In 1998, the SEC says, a territory manager for IBM-Korea met the head of operations for a South Korean government agency and gave him a shopping bag filled with 20 million Korean won, about $19,000. Over time, the same official received payments totaling about 80 million won, or about $76,000, by 2001. What did IBM supposedly get in return? Designation as a preferred supplier for mainframe computers, and an agreement to place orders at higher prices.

From 2004 through early 2009, it “engaged in a widespread practice of providing overseas trips, entertainment and improper gifts to Chinese government officials,” the SEC said, adding that the misconduct involved as many as 100 employees of IBM China.

In China, the SEC says, IBM China employees created what it describes as “slush funds” with local travel agencies that were used to pay the travel expense incurred by local government officials. Other slush funds, it says, were created with business partners to provide cash payments and gifts like cameras and notebook computers.

IBM is not alone in getting caught in these bribery cases. In August, Oracle, paid $2 million to settle an SEC case brought against it over allegations of misconduct in India. In 2010, Hewlett-Packard faced bribery charges in Russia, in a case that’s now being investigated by a court in Germany.

In the case of Intel, we already know much of the bad news that’s coming. Intel laid out the particulars on Sept. 7 when it warned about a sizable sales miss amid declining demand for its chips that go into nearly all of the world’s PCs and and most of its servers.

That day, Intel said it expects sales of $13.2 billion, give or take $300 million, down from the prior range of $13.8 billion to $14.8 billion. It also lowered its expected gross margin, a key metric indicating profitability of its operations, by a point, to 62 percent.

The big reason is the drop in PC sales, coupled with the fact that server sales are under pressure around the world as companies and governments trim IT budgets. Also, Intel hasn’t significantly penetrated the hot market of the moment for chips: It sells chips to only a smattering of smartphone and tablet vendors.

Intel shares have been punished since that pre-announcement, and fell by about 14 percent in the five weeks since then. Today, it’s notable that the shares are rising by about 3 percent on chatter that Apple could be considering moving away from Samsung as the company that builds its chips, and bringing Intel on instead. It doesn’t sound especially credible to me.

Analysts are expecting earnings of 50 cents on sales of $13.2 billion, and the whisper number is a penny below that.

At IBM it’s a similar story. The global economy in the form of slowing demand in Europe combined with the strength of the U.S. dollar versus the Euro and other currencies is providing the biggest headwind. Even so, IBM has announced its share of large IT deals, including one worth about $1 billion during the quarter.

Analysts expect IBM to report earnings on a per-share basis of $3.62 on sales of $25.4 billion. Chris Whitmore, an analyst with Deutsche Bank Securities, said in a note to clients yesterday that he expects Big Blue to report about $13 billion in bookings. Gross margins, which he expects to come in at 48.2 percent, should get a boost, he says, from ongoing cost-cutting actions and the increasing emphasis on software, evening out the economic turbulence. “We expect previous cost reduction actions to support another quarter of strong margins in Services,” Whitmore wrote. “As a result, we remain comfortable with our EPS estimates despite choppy macro conditions.”

Well, it has a name now, and as I suspected, it’s part of the growing Pure line. It has been dubbed the PureData System, and it comes in three flavors: One optimized for transactions, one for operations and one for big-data analytics. IBM announced the system late Monday, in connection with an event in Singapore.

In the announcement, Big Blue included one of those big-picture observations about the state of data and the unceasing struggle to get a handle on it all. According to IBM’s reckoning, 2.5 exabytes of data is created every day. (You know what a gigabyte is; after that are terabytes, then petabytes, then exabytes.) And the amount is growing so fast that 90 percent of the data that now exists has been created in the last two years. What this means is that the amount of data that companies and governments and people are creating is growing like crazy, and that doesn’t even begin to get the point across.

I talked with Arvind Krishna, general manager, IBM Information Management, and he compared the different flavors to a Web site selling stuff: One version of the system can handle all the sales; another handles the analytics one might use to figure out what combinations of products people buy together at different times of the year, or to watch for credit card fraud.

With these new systems, IBM is promising that it can handle problems like these in minutes instead of hours.

And it’s relatively easy to deploy, requiring less than 10 days to spin up, versus the six months that used to be required for this sort of thing. Once the machine is up, the database starts running with a single click on a console.

This quest for simplifying big problems is very much in vogue now. Oracle talked about it a great deal last week, in connection with its Exa line of engineered systems.

Here’s an example of the kinds of problems companies are grappling with: The Premier healthcare alliance is a collection of 2,700 hospitals in the U.S., and some 90,000 other health care facilities that collaborate to try to boost the overall quality of care they deliver. The group has selected IBM’s PureData System to analyze the largest collection of clinical, financial and medical outcomes to find useful patterns.

The database includes information on one out of every four hospital patient discharges in the U.S., 2.5 million clinical transactions every day gathered in real time, and $43 billion worth of annual purchasing data. It doesn’t take much imagination to assume that all this produces a lot of data.

If you can analyze data like that for patterns, you can make a real difference in the day-to-day efficiency of medical professionals, and probably save money along the way, with the result being better outcomes for patients.

Other potential customers, Krishna told me, are companies in the payment processing industry, who are constantly on the lookout for credit card fraud. “In the 200 or 300 milliseconds you have while the payment is going through, you can do a quick fraud assessment,” Krishna told me. “That’s an example of what we call a mixed workload.”

These are just the latest examples of IBM’s intention to boost its big-data business. It has acquired more than 30 companies in recent years to enhance its capabilities around analyzing data for useful business intelligence. Just last month, it announced plans to acquire U.K.-based Butterfly Software, and in April it acquired Vivismo and Varicent. Additionally, IBM has pledged to spend $100 million of its research and development budget over the next five years to tackle big-data problems.

The PureData system is the latest result of a four-year, $2 billion research and development effort that has so far yielded two other products: PureFlex and PureApplications. The PureFlex product combines computing, data storage, systems management and networking components in a single integrated product that’s preconfigured for the customer and is intended to be easy to deploy in a data center. PureApplications is a machine designed for database and Web transactions.

People familiar with the company’s plans tell AllThingsD that the product is known internally as “Project Sparta,” and that it is the latest result of a four-year, $2 billion research and development effort that has so far yielded two offerings in what Big Blue calls its PureSystems line. Details about the new product have been difficult to confirm, but IBM has scheduled an announcement for Oct. 9 at a company event in Boston.

First announced in April, the PureSystems line is intended to bring together all the necessary pieces needed to handle complex computing problems that typically require a combination of products from multiple vendors.

The first two products in that line were PureFlex and PureApplications. The PureFlex product combines computing, data storage, systems management and networking components in a single integrated product that’s pre-configured for the customer and intended to be easy to deploy in a data center. PureApplications is a machine designed for database and Web transactions. The company claims that the PureSystems line can cut the time required to set up a data center from as long as four months to as little as 10 days.

The PureSystems line is comparable in some ways to a new line of products from software giant and IBM rival Oracle. Since Oracle acquired Sun Microsystems in 2010, it has started selling what it calls “engineered systems” sold under the brand prefix “Exa-” with names like Exadata, Exalogic and Exalytics. The Exa line brings together a combination of hardware that is aimed at specific applications. Oracle is expected to make several announcements related to the Exa line at its annual Oracle Open World conference in San Francisco, starting Sunday.

IBM declined to comment, though it’s a pretty sure bet the product will have the word “pure” in its name. The move comes as the company has been stepping up the visibility of its efforts in the cloud-computing space, where it sells on-demand computing capacity in much the same way that Amazon does with its Amazon Web Services unit, and Salesforce.com does with its cloud-based customer relations management software.

IBM has acquired more than 30 companies in recent years to enhance its capabilities around analyzing data for useful business intelligence. Just this week, it announced plans to acquire U.K.-based Butterfly Software, and in April it acquired Vivismo and Varicent. Additionally, IBM has pledged to spend $100 million of its research and development budget over the next five years to tackle big-data problems.

Big Blue made the announcement today after the close of markets in New York. IBM shares are ticking up after hours, rising to $207.32, after closing at $204.98 during the regular session.

Ginni Rometty is a well-respected executive who took over as CEO on the first day of this year. She recently topped Fortune Magazine’s list of the “50 Most Powerful Women in Business,” though it was Yahoo CEO Marissa Mayer who made the cover. Rometty is generally credited with doing the heavy lifting to get PricewaterhouseCoopers Consulting fully integrated following its $3.5 billion acquisition by IBM in 2002.

Earlier this year, Rometty was also an unwilling figure in a national debate over Augusta National Golf Club’s longtime policy of excluding women from memberships. The complication was that the club had always offered an honorary membership to the CEO of IBM. The stories caused a brief national kerfuffle that prompted both President Obama and Republican presidential nominee Mitt Romney to weigh in. Ultimately, Augusta changed its policy and offered memberships to two women, including former Secretary of State Condoleezza Rice.

Rometty’s appointment also marks an end to the IBM career of Sam Palmisano, who will remain as a special consultant until he officially retires on Dec. 1. His tenure will be remembered for, among other things, a 125 percent increase in IBM’s share price and for the then-controversial decision to sell IBM’s PC business to China’s Lenovo.

And while this is probably not the moment to bring it up, it bears mentioning that Rometty is 55, and IBM’s policy has typically been that CEOs retire around the time they turn 60. However, there’s nothing saying that practice can’t or won’t be changed.

Anyway, here’s IBM’s official announcement.

Virginia M. Rometty Elected IBM Chairman

ARMONK, N.Y.–(BUSINESS WIRE)– The IBM (IBM) board of directors today elected Virginia M. Rometty chairman of the board, effective October 1, 2012. Mrs. Rometty succeeds Samuel J. Palmisano, who is stepping down from the board effective October 1, 2012.

Mr. Palmisano will become Senior Adviser to the company until he retires on December 1, 2012. As of October 1, 2012, Mrs. Rometty’s title will be IBM chairman, president and chief executive officer.

Mrs. Rometty, 55, is currently IBM’s president and chief executive officer. She succeeded Mr. Palmisano as IBM’s ninth CEO in January of this year, after holding senior leadership positions in IBM’s services, sales, strategy and marketing units. Mrs. Rometty led the successful integration of PricewaterhouseCoopers Consulting — the largest acquisition in professional services history, building a team of more than 100,000 business consultants and services experts. She became a director of IBM in January.

Mr. Palmisano, 61, became IBM chief executive officer in 2002 and chairman of the board in 2003. During his tenure, IBM transformed its product and services portfolio, exiting commoditizing businesses, including PCs, printers and hard disk drives, and greatly increasing investments in analytics, cloud computing and other high-value businesses and technologies. He has overseen the transformation of IBM from a multinational into a globally integrated enterprise. During Mr. Palmisano’s tenure as CEO, IBM created over $100 billion of total shareholder value.

That changed a little bit last year when he disclosed in a television interview and in SEC filings that he had taken stakes in two technology bellwethers: IBM and Intel. Today, SEC filings show that he’s increased his already sizable stake in IBM but has sold off his Intel shares.

Explaining that Big Blue “treats its stock with reverence,” Buffett last November spent $10.7 billion to buy 64 million IBM shares — amounting to about 5.5 percent of the shares outstanding — making him the company’s biggest shareholder, slightly ahead of State Street Investments. His holdings are now north of 66.6 million shares and worth more than $13 billion.

His holdings in Intel were much more modest: The same day he announced the IBM investment, Buffett disclosed a stake in Intel amounting to 9.3 million shares, which at the time was worth about $200 million. By the end of March, that investment had declined to about 7.8 million shares. Now the latest SEC filings show Berkshire Hathaway liquidated its Intel shares as of the end of June.

To IBM, those countries are great, but being more than 100 years old, it is accustomed to taking a longer view in its planning. Big Blue has been engaged in Africa for a long time, and already has a business presence in 20 African countries. Today, it kicked that up a notch by announcing the creation of a full-fledged research lab in Nairobi, the capital of Kenya.

Recently, a lot of IBM’s conversations about emerging markets have focused on Africa. Much of it has to do with the fact that so many countries on that continent are getting on their feet and wanting to modernize their economies. Last year, the International Monetary Fund forecast that the combined GDP of the sub-Saharan African countries would grow by nearly 6 percent this year, nearly three times the rate it sees in the U.S. And Kenya has been an example: Its economy, while still relatively small, has been growing like crazy. The size of its economy has nearly tripled since 2000. (See the graph, courtesy of Google Public Data, below.)

So, what exactly will IBM be doing there? What it does best: Solving complicated problems. You can’t have a conversation with anyone from IBM without soon hearing about its Smarter Cities initiative, which focuses on things like throwing powerful analytics at big infrastructure problems like transportation, and tracking problems in water systems. These are not trivial problems in the first place, and even less so when you think about the numbers involved. There are about a billion people in Africa, and right now about a third of them live in cities. By 2025, about half the African population will be living in cities, and some cities — Nairobi included — will see their numbers swell by 70 percent or more. That kind of growth can’t help but put a strain on traffic, water and other infrastructure, which are the kind of problems that IBM has proven itself pretty good at solving here in the U.S.

The results could be even better. In a note to clients issued Monday, Chris Whitmore, an analyst with Deutsche Bank Securities, said that while he expects sales to be in line with the consensus, IBM could report earnings that are as much as 10 cents above the consensus. One reason he expects a beat is the services business: Past deals should start paying off, Whitmore says.

You can’t go very far with IBM before you hear the word “analytics.” IBM has this thing about making different bits of the world smarter. Commerce is one thing; cities are another.

Then there’s the planet itself: IBM says it wants to generate $20 billion from new initiatives by 2015, and one of those is making things smarter using its analytics technologies. There’s money to be made in taking data that has previously been ignored, finding patterns in it, then gaining helpful insights. Other companies are getting analytics religion, too: Hewlett-Packard spent $12 billion last year to acquire Autonomy, which specializes in analytics software. Meanwhile, Splunk is coming public in an IPO slated for later this year.

I had the chance to talk about all this recently with Mike Rhodin, the senior vice president of IBM’s Software Solutions Group, during a visit to IBM’s headquarters in Armonk, N.Y.

AllThingsD: Mike, we hear a great deal about how important the analytics business is to IBM, to the point that we rarely hear from IBM these days when you don’t talk about analytics. Yet I think people are still getting their heads around what it means. Walk me through how IBM sees this.

Rhodin: The observation we’ve made, and you have to be careful with observations, is that analytics is something that’s becoming embedded in everything else. It used to be a thing. Analytics was initially business intelligence and dashboards, and when you say the word, that’s what many people still think of. They think of a dashboard with statistics and pie charts that kind of show you what’s going on. We think of it different. It’s that plus real-time analytics, statistical models — it’s starting to look at analytics in real time versus the past. The idea is that you instrument your processes and capture the data as it’s occurring, using statistical models to predict potential problems. So you’re going from reporting on past events to predicting future events. It’s that combination that we find very interesting.

What’s a good example?

We’ve done a TV ad on this, so you’ve probably heard of it. But it’s Sick Kids Hospital in Toronto. [Also featured in IBM's Centennial film.] We instrumented their data flows, and then we built analytics triggers to look through their data. We’re finding anomalies 24 hours before the doctors and nurses do, simply by instrumenting the physical world, pulling data together, using analytics to gain insight and then using that insight to hopefully get to a better outcome. And that pattern of instrumentation through insight is a repeating pattern of everything we call Smarter Planet.

How did IBM come to see this as so strategically important?

The whole story behind how we put this organization together was driven around an observation we made in 2006 about how the world was going to change. And that we had seen enough examples of this to know that this was real, and it represented a fundamental shift. Some people thought Smarter Planet was simply a marketing campaign, but it’s not. So if you think about Smarter Planet in simple terms, it comes out of the digitization of the physical world, the instrumentation of physical processes that’s going to generate huge amounts of new data, which is going to drive issues around storage, and what to do with all the data, how to analyze it. That pushes you toward real-time analytics and streaming technologies, because with real time, you don’t have to save the data — you want to look for anomalies as they occur. It’s the combination of multiple things happening at once that give you that trigger. So that pattern you see repeating itself throughout the physical world: Smart transportation systems, water systems, intelligent smart-grid systems, health-care systems like the one I described, these are example of real change that are going to occur in parts of the world around us that have been less benefited by information technology in the past. It’s the next big wave of IT spending.

And yet it’s not all about the physical world — you can apply the same patterns to the digital world, too, right? I’ve seen a lot of analytics-related news coming out of IBM that looks at data gathered in the digital realm.

Sure. You’ve seen us do things like sentiment analysis, tracking people’s opinions on the social networks about the Grammy Awards and the Super Bowl. Those are just examples of the same pattern of instrumenting, pulling data together and then looking for patterns. We’re doing a ton around retail. Two years ago, I was at my house in Vermont, and I looked at the paper that morning, and saw a story saying that, according to IBM, luxury goods sales were up. And I wondered who at IBM would have put out that press release. And then, a few minutes later, it was my own group. That was after the acquisitions of Coremetrics and Unica. Coremetrics had previously put out these regular reports, and so they became an IBM report. As we went into Black Friday and Cyber Monday last year, we had enhanced it so that we not only knew what was being bought, but what device people were using to buy it. So we could track purchases on the iPad versus Android versus Blackberry. And we actually published the statistics on that.

What did Unica bring to the table?

The level of information we’re gaining on instrumenting data sets is pretty dramatic. But it’s not just finding out what people are buying — you can also figure out what people are not buying. So you start to see trends in commerce that can tell you how you’re doing against your competitors. So one thing we can do is help companies figure out why things aren’t selling on their Web sites, so they can think through new tactics and offers they might create to get people buying again. The Unica acquisition comes in as a real-time automation of marketing. You feed real-time information into a marketing management program that automates the marketing of those things. And recently we closed in the acquisition of DemandTec, which can automate the pricing of those offers. So you can see how we’re stringing together a group of things we collectively call Smarter Commerce.

So if, for example, Best Buy and Amazon are going to have a fight over who has the best price on a TV, they can just automate it.

Yeah, they can automate it and just watch it go. It is a very interesting set of dynamics that’s unfolding around us. Commerce was one of those areas that we thought was ripe for transformation. We had some of our own internal technologies with our own e-commerce engine, WebSphere Commerce. But that was really about traditional order-capture e-commerce. Then we started thinking about commerce in a very broad sense. There are a lot of processes that exist between companies that do business with one another, and then helping those companies do business with their customers. So we put together a big process map that showed what products we had that addressed those processes, and where we didn’t have them, we had white boxes. Then we identified companies that did, and started to buy them. And over time, we’ve filled in that map.

Have you filled in the map entirely, or are you going to be buying more companies?

We’ve publicly said we’re going to spend $20 billion on acquisitions between now and 2015, and we haven’t finished yet. [Since this conversation, IBM has announced plans to acquire Varicent, a compensation and sales performance analytics company.] We’re always looking for good companies, and it’s part of our business model, and we have a stated intention to buy more.

And the highlight of that letter was an update on Big Blue’s progress toward meeting its growth targets for the year 2015. IBM has long promised to add $20 in per-share earnings and $20 billion in incremental revenue growth by that year. The crux of Rometty’s letter: “We’re on it.”

“The next decade holds enormous promise for IBM, most importantly because of what it holds for business and society at large. We are uniquely positioned to deliver the benefits of a vast new natural resource — a gusher of data from both man-made and natural systems that can now be tapped to help businesses and institutions succeed in an increasingly complex and dynamic global economy.”

So how will it get there? By doing more of what it’s been doing the last several years. In broad brushstrokes, that means pursuing lines of business that have a lot of value — and which carry a higher margin — and focusing less on hardware. Generally speaking, that has meant a big shift into services that bear a long-term revenue stream with them.

But it also means a shift to software. One key piece of the strategy has IBM generating about half of its segment profits from software by 2015. As of 2011, it was already at 44 percent.

It also means going global in a big way and reaching into smaller markets that are breaking out. About 22 percent of IBM’s revenue came from these so-called “growth markets” in 2011, and the plan is to push that to 30 percent by 2015. And it’s not coming from the BRIC countries you always hear about (Brazil, Russia, India, China) but others in Africa and Asia: Some 60 percent of revenue from growth countries comes from non-BRIC countries.

There’s a lot more of these interesting facts from IBM’s annual report in an infographic here.