IBM's big bet on Watson Health offers little return yet: $4B spent and 6K+ employees added in a year

Martin Schroeter, IBM senior vice president and chief financial officer

IBM ($IBM) broke out Watson Health as a separate business unit more than a year ago. It's since poured in a ton of money, with at least four major acquisitions worth a total of $4 billion. Its latest, largest acquisition of Truven Health Analytics just closed last week.

During that time, Watson Health has gone from having no dedicated staff to more than 6,000--only about 700 of which were hired, with remainder coming on board via acquisitions. That puts Watson Health in a tough spot to integrate all those workers and make sense of the business going forward.

It's already done a slew of partnerships, most recently with the American Cancer Society and the American Heart Association--adding to its early partners that included Medtronic ($MDT) and Johnson & Johnson ($JNJ).

The company said it's starting to see earnings results from all this rapid-fire activity. In the first quarter, it closed deals with "a few large healthcare insurers, who have millions of members that can use our Watson Health cloud-based solutions," IBM SVP and CFO Martin Schroeter said on the company's first quarter earnings call.

"We believe that the healthcare industry is moving to value-based care. It is still early stages, but as the market shifts, we're positioned to deliver value," he added. This sort of work is core to the analytics provided by Truven, so now that the $2.6 billion deal has closed, look for a lot more activity on that front since it already had more than 8,500 clients from across the life sciences, providers, payers and government agencies.

Watson Health is IBM's first industry-focused business, making it a major departure for the company. And, at least for now, it's more of a profit-drag than a revenue-booster.

"So now, looking at the profit results for this segment, the gross margin is impacted by a lower level of transactional revenue and the fact that more of our new areas where we're investing are cloud-based and build over time," concluded Schroeter on the Watson business.

Its Cognitive Solutions business, which includes Watson, had $4 billion in revenues, a decline of 1.7% from the same quarter a year ago. Gross profit in the first quarter was $8.7 billion, down from $9.5 billion a year earlier.

- here is the first-quarter earnings release
- and here is the transcript

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