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Blissfully expands from SaaS management into wider IT services aimed at midmarket

When Blissfully launched in 2016, it was focused on helping companies understand their SaaS usage inside their organizations, but over time the company has seen that there is a wider need, especially in midmarket companies, and today it announced it was expanding into broader IT management.

Company co-founder and CEO Ariel Diaz says that the startup began helping to track SaaS usage, eventually expanding into employee onboarding and exiting, and today they are expanding into a broader set of IT services.

“Our vision when starting a company was really that IT is being redefined in the age of SaaS. So step one was to help with everything around managing SaaS. And step two is what does that mean in terms of the broader IT management vision,” Diaz told TechCrunch.

Blissfully believed that SaaS was going to take a bigger and bigger part of IT in terms of mindshare, spend and how you manage it, and they turned out to be right. Now, they felt the time is right to expand their original idea to encompass more of the IT management function.

That has resulted in a newly expanded platform they are releasing today that not only includes the earlier SaaS management components that it’s been providing all along, but also four other new categories.

For starters they are offering IT asset management. “We are now offering the ability to track not just SaaS applications, but all your IT assets, including hardware devices and traditional software,” Diaz said.

Next, they are including help desk management and ticketing capabilities to handle requests that fall outside of their SaaS management workflows. In addition, they are adding role-based access control to allow different people access to various IT management services, which is increasingly essential during the pandemic as people are being forced to troubleshoot and manage various IT issues from home. Finally, the startup is opening up its APIs so that IT can tap into that and build customized functionality or workflows on top of the Blissfully platform.

Diaz believes that the company has reached a point of maturity when it comes to SaaS management, and they saw a need in the midmarket to provide these additional IT services that larger organizations tend to get from a company like ServiceNow.

The new services will be available starting today from Blissfully.

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Millennial Media’s Paul Palmieri launches Tradeswell, a startup promising to fix e-commerce margins

A new startup called Tradeswell said it’s using artificial intelligence to help direct-to-consumer and e-commerce brands build healthier businesses.

The company is led by Paul Palmieri, who previously took mobile advertising company Millennial Media public and then sold it to TechCrunch’s corporate parent AOL (now Verizon Media). Afterwards, Palmieri founded Grit Capital Partners, but he told me he decided to join Tradeswell as a co-founder and CEO because he was so excited about the vision.

Palmieri said that just as Millennial helped independent app developers get smarter about advertising, Tradeswell gives upstart e-commerce companies the data they need to compete with “the big platform behemoths.”

It’s no secret that a number of direct-to-consumer companies have struggled to make a profit due to challenging unit economics. Palmieri suggested that one reason for this is the fragmentation of their tools and data.

“If you’re selling something like Campbell’s Soup, you want to figure out, how is your tomato soup business and your chicken soup business?” Palmieri said. “Today, brands are saying, ‘How’s my Amazon business? How’s my Shopify business? How’s my Shopify business on Instagram?’ ”

So rather than relying on those platforms for data, Palmieri suggested brands want an independent platform that they trust to bring everything together, “where it’s a combination of a Bloomberg terminal plus a trading platform.”

Tradeswell’s AI focuses in six key areas of an e-commerce business: marketing, retail, inventory, logistics, forecasting, lifetime value and financials. Palmieri suggested that in some cases (like ad-buying), Tradeswell will replace existing software, while in other cases it will integrate.

“Think of us as a neural AI layer, where [a brand] might have different platform relationships, which are the fingers, and we’re the AI brain,” he said. “We’re giving brands insights and forecasts: If you make this change, we anticipate XYZ will happen.”

In some cases, like the aforementioned advertising, Tradeswell can also support full automation, so that merchants don’t have to worry about “setting up and tearing down hundreds of campaigns.”

The key, Palmieri said, is that the platform has access to the business’ full financials, so it can optimize for net margins, rather than simply driving the most impressions or clicks or sales.

While Tradeswell is only coming out of stealth mode today, it’s already been working with more than 100 brands. For example, Steve Tracy of Red Monkey Foods and San Francisco Salt Company said in a statement that the startup’s “unique, comprehensive, algorithmic approach has helped us grow sales, identify commercialization opportunities and forecast far more accurately.”

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Instacart raises $200M more at a $17.7B valuation

Instacart announced today that it has raised $200 million in a new funding round featuring prior investors. D1 Capital and Valiant Peregrine Fund led the investment. Instacart is now worth $17.7 billion, post-money, or $17.5 billion pre-money. The plan is to use the funding to focus on introducing new features and tools to improve the customer experience, and further support Instacart’s enterprise and ads businesses, according to a blog post.

Previously in 2020, Instacart raised $100 million in July, and $225 million in June. The June round valued the company at around $13.7 billion, meaning that the unicorn’s new funding round — raised just months later — came at a much higher price.

Instacart, like some other tech, and tech-enabled businesses, has seen demand for its service expand during the pandemic. It’s not hard to trace a connection between COVID-19 and its business results, as folks wanting to stay at home have turned to on-demand services to keep themselves safe.

The growth shown by Uber’s food delivery business is another example of this trend.

Instacart’s valuation has more than doubled since its 2018 Series F, when it was worth around $7.9 billion. The pace at which Instacart has created paper value is impressive, though its IPO plans appear murky from the outside and how much of its COVID-bump will be retained when the pandemic ends is not yet clear.

The startup famously turned a profit during a month in Q2, worth around $10 million per The Information. The same report indicated that Instacart lost around $300 million in 2019. What the company’s full-year profitability profile will look like is not known.

TechCrunch sent a number of questions to the firm, including if it has had any further profitable months in 2020, and how quickly it grew in Q3 2020. The company’s spokespeople did not answer those questions.

“Today’s investment is a testament to the strong conviction our existing investors have in the strength of our teams and the important role Instacart plays for customers, partners, and the entire grocery ecosystem,” Instacart CEO Apoorva Mehta said in a press release. “I’m incredibly proud of our team’s work to scale our business this past year and rise to meet the unprecedented consumer demand and growth.”

Instacart is one of the company’s caught up in a regulatory war after California passed AB5, which changed the state’s rules on gig workers. A voter proposition — Prop 22 — that would keep rideshare drivers and delivery workers classified as independent contractors, is coming up for a vote in California. Instacart is in favor of the proposition, along with Uber, Lyft, DoorDash and Postmates (now owned by Uber).

Uber, Lyft, Instacart and DoorDash have collectively contributed $184,008,361.46 to the Yes on 22 campaign. Those contributions have been monetary, non-monetary and have come in the form of loans. In September, the four companies each committed another $17.5 million to Yes on Prop 22 in monetary contributions. Of all the measures on this November’s ballot, Yes on Prop 22 has received the most contributions, according to California’s Fair Political Practices Commission.

Beyond Prop 22, Instacart is facing a lawsuit from Washington, D.C. District Attorney General Karl A. Racine that alleges the company charged customers millions of dollars in “deceptive service fees” and failed to pay hundreds of thousands of dollars’ worth of sales tax. The suit seeks restitution for customers who paid those service fees, as well as back taxes and interest on taxes owed to D.C. Specifically, it alleges Instacart misled customers regarding the 10% service fee to think it was a tip for the delivery person, from September 2016 to April 2018.

Meanwhile, amid the pandemic and wildfires in California, workers have demanded personal protective equipment and better pay, and, most recently, disaster relief.

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The Zebra reaches $100M run rate, turns profitable as insurtech booms

From a cluster of insurance marketplace startups raising capital earlier this year, to neoinsurance provider Lemonade going public this summer at a strong valuation, Hippo’s huge new round and Root’s impending unicorn IPO, 2020 has proven to be a busy year for startups and other growth-oriented private tech companies focused on insurance.

That news cycle continues today, with The Zebra announcing that it has reached a roughly $100 million run rate, and, perhaps even more notably, that it has turned profitable.

TechCrunch most recently covered the car and home insurance marketplace startup in February, when it raised the first $38.5 million in a Series C eventually worth $43.5 million that Accel led. As we noted at the time, the startup joined “Insurify ($23 million), Gabi ($27 million) and Policygenius ($100 million) in raising new capital this year.”

The Zebra released a number of financial performance metrics as part of its Series C cycle, including that it recorded revenues of $37 million in 2019, and that it had reached a $60 million annual run rate around the time of its Series C. The Zebra also said that it could double in size this year, putting it above a $100 million run rate by the end of 2020.

With that history in hand, let’s talk about the company’s more recent performance.

A changing market

According to the company, The Zebra recorded net revenue of $6 million in May, 2020. That number grew to around $8 million in September. For those of you able to multiply, $8 million times 12 is $96 million, or a hair under $100 million. According to a call with the The Zebra’s CEO Keith Melnick, the company’s September was very close to $8.3 million, a figure that would put it on a $100 million run rate.

Given that our $100 million ARR club has a history of granting startups a little wiggle room when it comes to their size, it seems perfectly fine to say that The Zebra has reached revenue scale of $100 million; at its current rate of growth, even if its final September revenue tally is a hair light. the company should reach a nine-figure topline pace in October.

According to Melnick, while the bulk of The Zebra’s revenue isn’t recurring, a growing portion of it is. Per the CEO, around 2-5% of The Zebra’s revenue was recurring last year, a figure that he said is up to around 10% today. (If The Zebra binds an insurance policy itself, and that policy is renewed, its commissions can recur.)

What drove the company’s quick 2020 growth? In part, the insurance market changed, with insurance networks that depended on in-person sales seeing their ability to drive business slow thanks to COVID-19. Insurance marketplaces like The Zebra stepped in to assist, helping move some offline demand online. Melnick detailed that dynamic to TechCrunch, adding that when certain advertising channels saw demand fall, his company was able to leverage inexpensive inventory.

A number of factors appear to have added to The Zebra’s rapid growth thus far in 2020. Our next question is whether other, related players in the insurtech startup space have seen similar acceleration. More on that in a few days.

Finally, regarding The Zebra, the company said that it is now profitable. Of course, profit is a squishy word in 2020, so we wanted to know precisely what the company meant by the statement. Per the company’s CEO, it is generating positive net income, the gold-standard for profitability as the metric is inclusive of all costs, including the non-cash expenses that startups tend to strip out of their numbers to make the results look better than they really are.

If other players in the insurtech space are surfing similar trajectories, all that capital that went into the sector around the start of the year is going to appear prescient.

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Greycroft, Lerer Hippeau and Audible back audio measurement startup Veritonic

Veritonic is announcing that it has raised $3.2 million in Series A funding led by Greycroft, with participation from Lerer Hippeau and Amazon-owned audiobook service Audible.

CEO Scott Simonelli, who founded the New York startup with COO Andrew Eisner and CTO Kevin Marshall, told me that his goal is to create a new category of “audio intelligence” — namely, measuring and predicting the effectiveness of any piece of audio content or advertising.

The company is focused on marketing initially, with its first product, Creative Measurement, analyzing any audio ad and showing marketers how it scores compared to similar content, as well as identifying which parts of the audio are most effective. And Veritonic is launching a new product, Competitive Intelligence, which helps businesses see how and where their competitors are spending on advertising and provides alerts when those competitors launch a new ad.

Simonelli said that until now, audio measurement has been limited to things like creating audience panels with a few hundred people, which simply doesn’t scale, given the enormous growth in the audio market.

Veritonic, on the other hand, has analyzed thousands of audio files, correlating the content with data about how people responded and using that analysis to predict how people will respond to new audio. Simonelli said the company can add more “fuel” by going out and gathering more human response data, but even without additional data, it can provide an instant prediction on an ad or campaign’s effectiveness.

Veritonic

Image Credits: Veritonic

Simonelli also noted that Veritonic has spent the past five years developing technology that’s specifically attuned to the challenges of measuring audio effectiveness — like the fact that audio is experienced over time and, even more than other media, needs to be memorable.

“We can look at a sonic profile and predict and evaluate how somebody is going to respond,” he said.

The ultimate goal, he added, is to create the “benchmark for audio advertising,” which means working with a variety of players in the industry. For example, he said that when you look at other audio investments in Greycroft’s portfolio (such as podcast network Wondery or podcast analytics company Podsights): “Veritonic makes every one of those audio investments more valuable.”

Veritonic’s made pretty good progress on that goal already, with partners including Pandora, SiriusXM and NPR, and brand clients like Pepsi, Visa and Subway. It was previously backed by Newark Venture Partners (whose founder Don Katz previously founded Audible).

“We are excited to be a part of Veritonic’s continued growth and success,” said Greycroft’s Alan Patricof in a statement. “I’m personally very passionate about the future of voice, and the team at Veritonic deeply understands how to use audio to drive recall, stickiness and brand awareness — which is hugely important in a highly-competitive consumer brand landscape.”

Simonelli added that Veritonic will use the new funding to expand its data science and sales teams. Eventually, he hopes to start analyzing non-advertising content as well — for example, since Audible is an investor, he said, “Analyzing every audiobook on the planet is something we’re ready for and excited to do.”

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Headroom, which uses AI to supercharge videoconferencing, raises $5M

Videoconferencing has become a cornerstone of how many of us work these days — so much so that one leading service, Zoom, has graduated into verb status because of how much it’s getting used.

But does that mean videoconferencing works as well as it should? Today, a new startup called Headroom is coming out of stealth, tapping into a battery of AI tools — computer vision, natural language processing and more — on the belief that the answer to that question is a clear — no bad Wi-Fi interruption here — “no.”

Headroom not only hosts videoconferences, but then provides transcripts, summaries with highlights, gesture recognition, optimised video quality and more, and today it’s announcing that it has raised a seed round of $5 million as it gears up to launch its freemium service into the world.

You can sign up to the waitlist to pilot it, and get other updates here.

The funding is coming from Anna Patterson of Gradient Ventures (Google’s AI venture fund); Evan Nisselson of LDV Capital (a specialist VC backing companies building visual technologies); Yahoo founder Jerry Yang, now of AME Cloud Ventures; Ash Patel of Morado Ventures; Anthony Goldbloom, the co-founder and CEO of Kaggle.com; and Serge Belongie, Cornell Tech associate dean and professor of Computer Vision and Machine Learning.

It’s an interesting group of backers, but that might be because the founders themselves have a pretty illustrious background with years of experience using some of the most cutting-edge visual technologies to build other consumer and enterprise services.

Julian Green — a British transplant — was most recently at Google, where he ran the company’s computer vision products, including the Cloud Vision API that was launched under his watch. He came to Google by way of its acquisition of his previous startup Jetpac, which used deep learning and other AI tools to analyze photos to make travel recommendations. In a previous life, he was one of the co-founders of Houzz, another kind of platform that hinges on visual interactivity.

Russian-born Andrew Rabinovich, meanwhile, spent the last five years at Magic Leap, where he was the head of AI, and before that, the director of deep learning and the head of engineering. Before that, he too was at Google, as a software engineer specializing in computer vision and machine learning.

You might think that leaving their jobs to build an improved videoconferencing service was an opportunistic move, given the huge surge of use that the medium has had this year. Green, however, tells me that they came up with the idea and started building it at the end of 2019, when the term “COVID-19” didn’t even exist.

“But it certainly has made this a more interesting area,” he quipped, adding that it did make raising money significantly easier, too. (The round closed in July, he said.)

Given that Magic Leap had long been in limbo — AR and VR have proven to be incredibly tough to build businesses around, especially in the short to medium-term, even for a startup with hundreds of millions of dollars in VC backing — and could have probably used some more interesting ideas to pivot to; and that Google is Google, with everything tech having an endpoint in Mountain View, it’s also curious that the pair decided to strike out on their own to build Headroom rather than pitch building the tech at their respective previous employers.

Green said the reasons were two-fold. The first has to do with the efficiency of building something when you are small. “I enjoy moving at startup speed,” he said.

And the second has to do with the challenges of building things on legacy platforms versus fresh, from the ground up.

“Google can do anything it wants,” he replied when I asked why he didn’t think of bringing these ideas to the team working on Meet (or Hangouts if you’re a non-business user). “But to run real-time AI on video conferencing, you need to build for that from the start. We started with that assumption,” he said.

All the same, the reasons why Headroom are interesting are also likely going to be the ones that will pose big challenges for it. The new ubiquity (and our present lives working at home) might make us more open to using video calling, but for better or worse, we’re all also now pretty used to what we already use. And for many companies, they’ve now paid up as premium users to one service or another, so they may be reluctant to try out new and less-tested platforms.

But as we’ve seen in tech so many times, sometimes it pays to be a late mover, and the early movers are not always the winners.

The first iteration of Headroom will include features that will automatically take transcripts of the whole conversation, with the ability to use the video replay to edit the transcript if something has gone awry; offer a summary of the key points that are made during the call; and identify gestures to help shift the conversation.

And Green tells me that they are already also working on features that will be added into future iterations. When the videoconference uses supplementary presentation materials, those can also be processed by the engine for highlights and transcription too.

And another feature will optimize the pixels that you see for much better video quality, which should come in especially handy when you or the person/people you are talking to are on poor connections.

“You can understand where and what the pixels are in a video conference and send the right ones,” he explained. “Most of what you see of me and my background is not changing, so those don’t need to be sent all the time.”

All of this taps into some of the more interesting aspects of sophisticated computer vision and natural language algorithms. Creating a summary, for example, relies on technology that is able to suss out not just what you are saying, but what are the most important parts of what you or someone else is saying.

And if you’ve ever been on a videocall and found it hard to make it clear you’ve wanted to say something, without straight-out interrupting the speaker, you’ll understand why gestures might be very useful.

But they can also come in handy if a speaker wants to know if he or she is losing the attention of the audience: The same tech that Headroom is using to detect gestures for people keen to speak up can also be used to detect when they are getting bored or annoyed and pass that information on to the person doing the talking.

“It’s about helping with EQ,” he said, with what I’m sure was a little bit of his tongue in his cheek, but then again we were on a Google Meet, and I may have misread that.

And that brings us to why Headroom is tapping into an interesting opportunity. At their best, when they work, tools like these not only supercharge videoconferences, but they have the potential to solve some of the problems you may have come up against in face-to-face meetings, too. Building software that actually might be better than the “real thing” is one way of making sure that it can have staying power beyond the demands of our current circumstances (which hopefully won’t be permanent circumstances).

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As IBM spins out legacy infrastructure management biz, CEO goes all in on the cloud

When IBM announced this morning that it was spinning out its legacy infrastructure services business, it was a clear signal that new CEO Arvind Krishna, who took the reins in April, was ready to fully commit his company to the cloud.

The move was a continuation of the strategy the company began to put in place when it bought Red Hat in 2018 for the princely sum of $34 billion. That purchase signaled a shift to a hybrid-cloud vision, where some of your infrastructure lives on-premises and some in the cloud — with Red Hat helping to manage it all.

Even as IBM moved deeper into the hybrid cloud strategy, Krishna saw the financial results like everyone else and recognized the need to focus more keenly on that approach. In its most recent earnings report overall IBM revenue was $18.1 billion, down 5.4% compared to the year-ago period. But if you broke out just IBM’s cloud and Red Hat revenue, you saw some more promising results: cloud revenue was up 30 percent to $6.3 billion, while Red Hat-derived revenue was up 17%.

Even more, cloud revenue for the trailing 12 months was $23.5 billion, up 20%.

You don’t need to be a financial genius to see where the company is headed. Krishna clearly saw that it was time to start moving on from the legacy side of IBM’s business, even if there would be some short-term pain involved in doing so. So the executive put his resources into (as they say) where the puck is going. Today’s news is a continuation of that effort.

The managed infrastructure services segment of IBM is a substantial business in its own right, generating $19 billion annually, according to the company, but Krishna was promoted to CEO to clean house, taking over from Ginni Rometti to make hard decisions like this.

While its cloud business is growing, Synergy Research data has IBM public cloud market share mired in single digits with perhaps 4 or 5%. In fact, Alibaba has passed its market share, though both are small compared to the market leaders Amazon, Microsoft and Google.

Like Oracle, another legacy company trying to shift more to the cloud infrastructure business, IBM has a ways to go in its cloud evolution.

As with Oracle, IBM has been chasing the market leaders — Google at 9%, Microsoft 18% and AWS with 33% share of public cloud revenue (according to Synergy) — for years now without much change in its market share. What’s more, IBM competes directly with Microsoft and Google, which are also going after that hybrid cloud business with more success.

While IBM’s cloud revenue is growing, its market share needle is stuck and Krishna understands the need to focus. So, rather than continue to pour resources into the legacy side of IBM’s business, he has decided to spin out that part of the company, allowing more attention for the favored child, the hybrid cloud business.

It’s a sound strategy on paper, but it remains to be seen if it will have a material impact on IBM’s growth profile in the long run. He is betting that it will, but then what choice does he have?

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Amazon debuts its first fully electric delivery vehicle, created in partnership with Rivian

Amazon has received delivery of its very first, custom-built EV delivery van — a vehicle built through its partnership with electric transportation startup Rivian. The van doesn’t look too different from existing, traditional fuel and hybrid commercial delivery vans (though there are a lot more rounded edges), but most of the innovation is happening in less obvious places.

In a blog post detailing the vehicle, Amazon outlined some of the unique features of its custom vehicle, including sensor-based highway driving and traffic assist features; exterior cameras that can provide a 360-degree view for the driver via a digital display; a larger interior floor space in the cabin to help with drivers getting to and from the cabin compartment; surround tail lights for better braking visibility for other drivers; integrated three-level shelving and a bulkhead cargo compartment separating door; and finally, of course –built-in Alexa voice assistant integration.

Amazon announced a sizeable investment in Rivian in 2019, when it led a $700 million round for the startup EV maker. The e-commerce giant then announced last September that it was ordering 100,000 of the custom-made electric delivery vans. Rivian also intends to build and ship electric pickups and SUVs to consumers, on top of its commercial vehicle plans.

Amazon plans to ramp deployment of its all-electric fleet form here, starting with 10,000 custom vans on roads globally within the next two years, and then expanding to a total fleet size of that full 100,000 order by 2030, the company says. Rivian, meanwhile, says it has begun a pilot production line run of its Illinois factory, and plans to begin delivery of its SUV starting in June 2021, with shipments of its SUV starting next August.

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Revolut lets you track your subscriptions, adds savings bonus in the US

Fintech startup Revolut has rolled out a handful of additional features over the past few days. The financial app lets you track all your subscriptions that you pay with your Revolut account or your card. In the U.S., Revolut is adding a savings bonus based on your purchasing habits. Finally, business customers can now order metal cards.

Let’s start with subscription tracking. For customers in Europe, Revolut is trying to make it easier to stay on top of your various subscriptions. Direct debit or card transactions are automatically marked as recurring. You can also manually mark transactions as subscriptions in case they aren’t automatically marked.

After that, you can see all your recurring payments from the app and check how much you’re spending with each merchant. If you spot a subscription that you completely forgot, you can block it — future payments will be declined.

And if you don’t have a lot of money on your account, you receive a notification warning you that a subscription payment is coming up. Subscriptions can be accessed from the Payments tab under Scheduled.

If you have multiple bank accounts, some users might switch their payment information to their Revolut card just to keep all their subscriptions in Revolut. It could boost usage.

4.5% bonus on savings accounts in the U.S.

In some markets, Revolut offers savings vaults. As the name suggests, those sub-accounts let you put some money aside and earn interest. You can round up card transactions and save spare change in a vault, you can set up weekly or monthly transactions or you can transfer money manually whenever you want.

In the U.S., customers earn 0.25% annualized percentage yield (APY) with their savings vaults. If you pay for a premium subscription, you get 0.5% APY with a Revolut Premium or Revolut Metal plan.

During the COVID-19 pandemic, you get a generous bonus on top of your normal interest rate: Revolut calculates how much you spent with your Revolut debit card the previous month; that amount is eligible for a 4.5% APY bonus.

For instance, if you spent $400 with your card last month and you have $500 in your savings vault, you’ll receive the 4.5% bonus on $400. You’ll also earn 0.25% to 0.5% on the entire savings vault.

If your savings vault balance is lower than how much you spent with your card last month, your entire vault is eligible for the bonus. Interest is calculated daily using an annualized rate and paid out the first business day of the following month.

Once again, the new feature should boost engagement in the U.S. for both card transactions and savings vaults. Revolut has 13 million customers in total, including 150,000 in the U.S.

Metal cards for business customers

People care about metal cards. That’s why many fintech startups now offer expensive monthly plans with metal cards — N26, Bunq, Curve and Revolut.

But Revolut Business customers have been limited to plastic cards (or virtual cards). If you use Revolut Business for your company, you can now order metal cards depending on your plan.

Revolut Business customers with a free account or a freelancer account can’t order metal cards. Customers on the Grow, Scale or Enterprise plans receive one, two or five metal cards respectively.

And if you want to order more metal cards, it costs £49 per card. You can choose a card among five different colors — black, gold, rose gold, space grey and silver.

Other than a new look, metal cards don’t differ from standard cards. It’s a small perk that you get with a paid plan. Revolut has managed to attract 500,000 customers for its Revolut Business product.

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IBM plans to spin off infrastructure services as a separate $19B business

IBM, a company that originally made its name out of its leadership in building myriad enterprise hardware (quite literally: its name is an abbreviation for International Business Machines), is taking one more step away from that legacy and deeper into the world of cloud services. The company today announced that it plans to spin off its managed infrastructure services unit as a separate public company, a $19 billion business in annual revenues, to help it focus more squarely on newer opportunities in hybrid cloud applications and artificial intelligence.

Infrastructure services include a range of managed services based around legacy infrastructure and digital transformation related to it. It includes things like testing and assembly, but also product engineering and lab services, among other things. A spokesperson confirmed to me that the deal will not include the company’s servers business, only infrastructure services.

IBM said it expects to complete the process — a tax-free spin-off for shareholders — by the end of 2021. It has not yet given a name to “NewCo” but it said that out of the gate the spun-off company will have 90,000 employees, 4,600 big enterprise clients in 115 countries, a backlog of $60 billion in business “and more than twice the scale of its nearest competitor” in the area of infrastructure services.

Others that compete against it include the likes of BMC and Microsoft. The remaining IBM business is about three times as big: it currently generates some $59 billion in annual revenues.

At the same time that IBM announced the news, it also gave some updated guidance for Q3, which it plans to report officially later this month. It said it expects revenues of $17.6 billion, with GAAP diluted earnings per share from continuing operations of $1.89, and operating (non-GAAP) earnings per share of $2.58. As a point of comparison, in Q3 2019 it reported revenues of $18 billion. And last quarter IBM reported revenues of $18.1 billion. Tellingly, the division that contains infrastructure services saw declines last quarter.

The market seems to like the news: IBM shares are trading up some 10% ahead of the market opening.

The move is a significant shift for the company and underscores a bigger sea change in how enterprise IT has evolved and looks to continue changing in the future.

IBM is betting that legacy infrastructure and the servicing of it, while continuing to net revenues, will not grow as it has in the past, and as companies continue with their modernization (or “digital transformation,” as consultants like to refer to it today), they will turn increasingly to outsourced infrastructure and using cloud services, both to run their businesses and to build the services that interface with consumers. IBM, meanwhile, is in a race competing against the likes of Microsoft and Google in cloud services, and so doubling down on that part of the business is another way to focus on it for growth.

But IBM, often referred to as “Big Blue”, is also using the announcement as the start of an effort to streamline its business to spur growth (maybe we’ll have to rename it “Medium Blue”).

“IBM is laser-focused on the $1 trillion hybrid cloud opportunity,” said Arvind Krishna, IBM CEO, in a statement. “Client buying needs for application and infrastructure services are diverging, while adoption of our hybrid cloud platform is accelerating. Now is the right time to create two market-leading companies focused on what they do best. IBM will focus on its open hybrid cloud platform and AI capabilities. NewCo will have greater agility to design, run and modernize the infrastructure of the world’s most important organizations. Both companies will be on an improved growth trajectory with greater ability to partner and capture new opportunities – creating value for clients and shareholders.”

Its $34 billion purchase of Red Hat in 2019 is perhaps its most notable investment in recent times in IBM’s own transformation.

“We have positioned IBM for the new era of hybrid cloud,” said Ginni Rometty, IBM Executive Chairman in a statement. “Our multi-year transformation created the foundation for the open hybrid cloud platform, which we then accelerated with the acquisition of Red Hat. At the same time, our managed infrastructure services business has established itself as the industry leader, with unrivaled expertise in complex and mission-critical infrastructure work. As two independent companies, IBM and NewCo will capitalize on their respective strengths. IBM will accelerate clients’ digital transformation journeys, and NewCo will accelerate clients’ infrastructure modernization efforts. This focus will result in greater value, increased innovation, and faster execution for our clients.”

More to come.

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