(Bloomberg) -- International Business Machines Corp. plans to invest $1.2 billion to expand its cloud services, bolstering a business it’s counting on for growth after spending $2 billion last year to acquire SoftLayer Technologies Inc.
The company, the world’s largest provider of technology services, plans to add 15 new data centers worldwide by the end of 2014, said Lance Crosby, chief executive officer of SoftLayer. IBM is winding down its separate SmartCloud Enterprise product as early as the first quarter of this year, except for a premium service that will be offered along with SoftLayer’s, he said in an interview.
IBM is trying to keep up as customers shift from buying their own computer servers to relying on the cloud, where data and applications are delivered online instead of being stored locally. A slump in demand for hardware has contributed to six straight reported quarters of declining revenue, forcing the Armonk, New York-based company to adapt.
“That’s the transformation that IBM is in right now,” Crosby said. “That’s why we are spending the money.”
The new investment shows that IBM views SoftLayer as one of its biggest bets. The price the technology giant paid to acquire the Dallas-based company last year was the biggest it has disclosed for a takeover since the purchase of software company Lotus Development Corp. in 1995, according to data compiled by Bloomberg.
SoftLayer has added about 2,400 customers since the takeover, up from about 20,000 at the time of the acquisition, Crosby said.
IBM didn’t specify how soon it will invest the $1.2 billion nor how it was budgeting for the expense. The company averages about $4 billion a year in capital expenditures.
SoftLayer is becoming the backbone for IBM’s cloud business, with related services being integrated with the platform, Crosby said. The 15 new data centers will bring the company’s total to 40 locations in 13 countries, IBM said today in a statement.
“This is fundamental because this allows us global coverage,” Erich Clementi, senior vice president of global technology services, said in an interview. “We are continuing to invest in where we think the growth areas are going to be over the next years.”
Two of the centers will serve the Washington area to better support possible government contracts, Crosby said. While IBM won a cloud-computing contract of as much as $1 billion with the U.S. Department of the Interior last August, the industry is filled with new rivals eager to convert IBM’s hardware customers into cloud users. In October, IBM abandoned a court fight over the U.S. Central Intelligence Agency’s decision to award Amazon.com Inc a $600 million cloud-computing contract.
IBM clients using SmartCloud Enterprise, its previous service, have already been switched to the newer product. Crosby said some of the employees who worked on SmartCloud Enterprise have moved to SoftLayer, while others have found positions elsewhere at IBM.
The company declined to comment on whether any jobs were lost due to the closing of SmartCloud.
IBM reported more than $1 billion in sales from cloud services last quarter, the first time it has disclosed revenue from that segment. The U.S. Securities and Exchange Commission is looking into how IBM reports its revenue from the cloud business, the company said in July.
The plans for investment in SoftLayer’s cloud platform follows IBM’s move last week to create a new business division around its Watson technology, which can analyze large volumes of data and answer questions in conversational language. IBM will invest more than $1 billion in the unit and give it its own headquarters in New York. Watson’s big-data services, which let customers mine vast troves of information, will be run on SoftLayer’s cloud, the company said.
IBM shares were little changed at $189.29 at 9:43 a.m. in New York. Technology companies in the Standard & Poor’s 500 Index were down less than 1 percent.
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