Data Sheet—Thursday, February 26, 2015

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HERE’S WHAT GINNI ROMETTY WILL TELL IBM INVESTORS

IBM chairman and CEO Ginni Rometty remains confident in her company’s long-term ability to “endure.” Now, she must convince skeptical investors to remain patient. Again.

Speaking with the media shortly before the company’s annual investor briefing Thursday, Rometty outlined her key messages for shareholders. Throughout the day, she said management will offer “uncharacteristic detail” about bold spending plans and the need for more “open ecosystem” partnerships. You can expect these to model the alliances forged in recent months with Apple (enterprise mobility) and Softbank (new analytics services built on Watson). One priority: pacts that solidify IBM's analytics offerings in strategic industry sectors.

“There will be no doubt in your mind about our beliefs, our plans,” she told journalists.

Among the high-level blueprints with a short-term financial impact: IBM intends to invest $4 billion on analytics, mobility, cloud computing, and security. It will do this by increasing and shifting spending, but that amount doesn’t count acquisitions. You can definitely expect more, to fill market gaps or accelerate share. “When we move, it’s when we see long-term value,” Rometty said.

At the end of 2014, these areas accounted for 27% of IBM’s overall revenue, about $25 billion. Within four years, they will drive 40% of revenue, an anticipated $40 billion, she predicted. “The core is innovated, we have confidence in these strengths,” she said.

Last year, hardware drove barely 10% of IBM's sales. The unit remains profitable as the company divests low-margin businesses, like it did by selling its low-end server portfolio to Lenovo. That's a pattern the company's financial management intends to repeat as the transition continues. For perspective, IBM's overall revenue dipped to $93 billion in 2014, from $107 billion back in 2011.

“Much of our decline in revenue has been engineered by us,” Rometty said.

That may be so, but investors are growing impatient with how long the turnaround is taking. Rometty’s previous long-term plan envisioned hitting $20 per share in operating earnings this year. The guidance is now $15.75 to $16.50 per share.

TRENDING

You might want to reconsider that Chinese expansion plan. Many high-tech companies have struggled there since Edward Snowden exposed how the U.S. government uses information technology for surveillance. Now, some pretty high-profile companies have been knocked the official government procurement list, including Cisco, Apple, Citrix and Intel’s McAfee security portfolio. Concern over spying or a way to give preference to domestic suppliers? You decide.

Google regroups. The Internet giant merged its two European divisions into one organization run from London. The apparent motivation: tighter control over its data privacy policies and sales practices amid fierce scrutiny from both the European Union and individual countries.

Networking nuptials. Avago Technologies is officially buying struggling Emulex for about $606 million. Meanwhile, Bloomberg reports that Hewlett-Packard is courting wireless equipment maker Aruba Networks. The latter’s market cap is around $2 billion.

Storage startup scales up. Exablox, led by former SonicWALL CEO Douglas Brockett, adds Dell Ventures as a strategic investor with its $16 million Series C funding round. Also backing the company are DCM Ventures, Norwest Venture Partners, and US Venture Partners. The total raised so far: $38.5 million.

From smartphones to things. British chip design ARM Holdings, which makes technology used in more than 95% of Apple iPhones or Android phones, plans a big push into connected devices. It’s worth mentioning that Intel’s Internet of things group was its fastest-growing division last year.

Be careful what you say around your Samsung television. A high-profile privacy group is worried that voice-control features could be used to record private conversations. It wants the FTC to investigate.

Which company leads for European patents? It isn’t IBM, but it is a certain high-profile maker of smartphones and voice-activated TVs. The same company that just announced a salary freeze.

More secure Android smartphones. Google and BlackBerry are teaming up on security. Plus, new software will separate personal apps from professional ones. These are good things.

Apple must be expecting lots of women to buy its smartwatch. First, it engineered a Self magazine cover. Now, it’s buying a 12-page Vogue ad.

WHY CLOUD SOFTWARE COMPANIES LOVE DEFERRED REVENUE

Salesforce just became the fastest business software company to reach $5 billion in annual revenue. Now, it’s shooting for $10 billion.

One reason chairman CEO Marc Benioff is so confident: tremendous insight into future sales. "Salesforce delivered yet another year of exceptional growth, with revenue, deferred revenue and operating cash flow all growing more than 30%, while exceeding our expectations in non-GAAP operating margin improvement."

As of Jan. 31, the software giant counted $5.7 billion in unbilled deferred revenue—sales that are contracted, but not yet reflected on the balance sheet.

For perspective, that’s more than the total annual sales reported by Salesforce in 2014, which neared $5.4 billion. Its guidance for the year ahead: $6.5 billion to $6.52 billion. Its loss for the year, $262.2 million. No matter, the outlook inspired Salesforce’s shares to jump 10% in after-hours trading.

Salesforce is not alone in talking up deferred revenue as a measure of its future success. Hortonworks is using a similar tactic by talking up billings.

Technically speaking, the company underdelivered this week for its first quarter as a public company. That is, if you pay attention to traditional measures, such GAAP revenue or net income (loss). Not if you look at Hortonworks’ billings, though.

“I think the top line is that we have momentum in terms of billings growth, that is the right way to look at and measure our progress,” CEO Rob Bearden, told me Wednesday during a conversation about his company’s results.

More on his spin in a moment, here are the relevant numbers: Total GAAP revenue for fiscal year 2014 grew 91% to $46 million. (It was $52.1 million before the impact of warrants exercised by AT&T and Yahoo). Hortonworks’ GAAP net loss widened to $177.4 million, compared with $63.1 million the previous year.

Bearden would rather have you consider the billings number for the year: $87.1 million: $87.1 million (a 134% increase that makes it look much closer in size to its big rival Cloudera). That number includes non-GAAP revenue, plus “the sequential quarterly change in deferred revenue.”

Fundamentally, this is because Hortonworks offers subscriptions for its software plus many “premeditated services” to get its software up and running for customers. During the fourth quarter, for example, Hortonworks added 99 “support subscription” customers, bringing its total to 332. (Reference accounts listed on its website include eBay, Priceline.com, and Spotify.)

Right now, Bearden estimates that an average of 30% of quarterly revenue is attributable to implementation and training services, with the rest from software subscriptions. Over the next six to eight quarters, this will shift to a 20% to 80% mix (services to software), he said.

“We could be double the size if we really built our services business and staffed for full delivery,” Bearden said. “What we believe is more important and appropriate is that we leverage the [Hadoop] ecosystem and certify industry-leading systems integrators on our technology.”

Incidentally, Hortonworks’ guidance calls for fiscal year 2015 billings of $150 million to $156 million. It is expecting annual revenue of $83.5 million to $86.5 million.

MY FORTUNE.COM BOOKMARKS

Notes from Silicon Valley’s trial of the year by Adam Lashinsky

The two most important words in a job interview by Anne Fisher

How to manager your inbox (before it manages you) by Camille Preston

This is how hard it is to get a job at Apple by Ben Geier

Why women are undervalued in Silicon Valley by Kim Gordon, Shambhavi Kada

Warren Buffett’s secret to staying young: “I eat like a six-year-old.” by Patricia Sellers

ONE MORE THING

You, too, can print your own jet engine. Or at least, parts of one. Australian researchers are working on prototypes for Boeing, Airbus, Raytheon and Safran. Test flights could begin within the next 12 months.

MARK YOUR CALENDAR

Gartner CIO Leadership Forum: Digital business strategy. (March 1 – 3; Phoenix)

DocuSign Momentum. E-signatures and digital transactions. (March 10 – 12; San Francisco)

Microsoft Convergence: Dynamics solutions. (March 16 – 19; Atlanta)

IDC Directions 2015: Innovation in the 3rd Platform era. (March 18; Boston)

Cisco Leadership Council: CIO-CEO thought leadership. (March 18 - 20; Kiawah Island, South Carolina)

Technomy Bio: The big picture on transformation. (March 25; Mountain View, California)

Gartner Business Intelligence & Analytics Summit: Crossing the divide. (March 30 – April 1; Las Vegas)

AWS Summit. First in a series of cloud strategy briefings. (April 9; San Francisco)

Knowledge15: Automate IT services. (April 19 – 24; Las Vegas)

RSA Conference: The world talks security. (April 20 – 24; San Francisco)

Forrester’s Forum for Technology Leaders: Win in the age of the customer. (April 27 - 28; Orlando, Fla.)

MicrosoftIgnite: Business tech extravaganza. (May 4 – 8; Chicago)

NetSuite SuiteWorld: Cloud ERP strategy. (May 4 – 7; San Jose, California)

EMC World: Data strategy. (May 4 - 7; Las Vegas)

SAPPHIRE NOW: The SAP universe. (May 5 – 7; Orlando, Florida)

Gartner Digital Marketing Conference: Reach your destination faster. (May 5 – 7; San Diego)

Annual Global Technology, Media and Telecom Conference: JP Morgan’s 43rd invite-only event. (May 18 - 20; Boston)

HP Discover: Trends and technologies. (June 2 - 4; Las Vegas)

Brainstorm Tech: Fortune’s invite-only gathering of thinkers, influencers and entrepreneurs. (July 13 - 15; Aspen, Colorado)

VMworld: The virtualization ecosystem. (Aug. 30 – Sept. 3, 2015; San Francisco)

Dreamforce: The Salesforce community. (Sept. 15 - 18; San Francisco)

Gartner Symposium ITxpo: CIOs and senior IT executives. (Oct. 4 - 8; Orlando, Florida)

Oracle OpenWorld: Customer and partner conference. (Oct. 25 - 29; San Francisco)