Yesterday the executives at IBM (IBM) held a conference call with the analysts. As per a transcript of the call, the company used the words “cloud”, “software” and “services” several times. Even though this cannot be used as an exact indicator about the company’s new priorities however, comparing these words to the number of times traditional words were used in the call, it is safe to say that IBM (IBM) is looking in a new direction. The company, being a computer brand, only used the more traditional words “hardware”, “system” and “power” only a few times.

This may also indicate that IBM (IBM) will gladly discuss its flourishing businesses and ignore the more declining ones. The company reported its earnings for the second quarter yesterday. This was the ninth consecutive quarter in which the company saw a decline in its revenue. The revenue generated was $24.4 billion, which is 3% less than its revenue last year. The company faced a reduction in the stocks of its Systems and Technology unit. It is mostly involved in computer hardware. The company sales were $3.3 billion meeting a fall of 16%. Analysts had predicted a per share price of $4.29, however, IBM (IBM) stocks were sold at $4.32. This was 34% higher than the value last year. This morning, though, the company’s shares fell.

IBM (IBM) wishes to develop its cloud business so that by the end of this year, it is as big as its hardware business but generates twice the profit. The revenue generated from the cloud business increased. By the end of the year, it is expected to generate $2.8 billion. If you add to it private applications and clouds, this could potentially become a business worth $7 billion.

IBM (IBM)’s new plan is now to invest in businesses that generate more profit. Is has made a deal with Lenovo to sell its systems unit and will soon make a sale of the chip unit as well. IBM (IBM) has not publicized the probable success of the cloud business yet but we can look at other companies to make an educated guess. Amazon.com Inc. (AMZN)’s AWS is expected to generate revenue worth $5 billion with 90% gross margin. This gross margin is about the same as that of IBM (IBM)’s software unit. Meanwhile, Rackspace earned $1.5 billion in revenue at 67% gross margin. The company has a lower profit margin because it aims at providing intensive services to customers.

IBM (IBM) has an applications business that provides services over cloud. However, the services will be provided through mobile devices like tablets and smartphones. This business would resemble that of Salesforce.com that has 75%+ gross margins. Workday’s gross margins have been over 60%. We will make an educated assumption that the cloud business of IBM (IBM) will generate annual revenue of $11 billion with growth margins of 70 percent by 2015 fiscal. The cloud would generate profits of $8 billion, making it about the same size as the hardware business and twice as profitable.

Get Free Updates and Stock Alerts!

*We only send one email per week