General Electric Co. wants its industrial software business to cut costs and lift profits next year under new CEO John Flannery, and is considering expanded partnerships and the possible sale of some equity in the unit, according to people familiar with the business.
Former CEO Jeffrey Immelt spent six years and more than $4 billion transforming 125-year-old GE into a “digital industrial” company. But GE has had technical problems and delays with its software platform, known as Predix, which connects equipment like turbines and elevators to computers that can predict failures and reduce operating costs.
This spring, GE called an unusual, two-month “time-out” to tackle the Predix problems, which have not been previously reported. With fixes in place, GE will now emphasize sales to existing customers in its energy, aviation and oil and gas businesses, and scale back efforts to sell to new customers in other sectors, three senior GE executives told Reuters.
“Our resources will go to our fastest-selling markets,” GE Digital CEO Bill Ruh said in an interview.
To help investors better understand Predix, GE also has redefined digital revenue to exclude $3 billion in hardware related to its gas-fueled power plants, providing a clearer picture of the “pure” software business and avoiding double-counting, CFO Jeff Bornstein said.
The company now expects $12 billion in digital revenue in 2020, compared with $15 billion under the old definition. GE’s total revenue hit nearly $124 billion last year.
The changes mark an important course correction for GE Digital, which so far has not delivered the revenue investors wanted and is partly responsible for a 25 percent decline in GE’s share price this year to a near two-year low.
GE estimates the industrial Internet market will be worth $225 billion a year by 2020, and Flannery, who became CEO on Aug. 1, appears committed to Immelt’s vision of being a major player, according to two people familiar with his thinking.
But the 55-year-old leader, known for finance skills and making tough decisions, is likely to press GE Digital to reduce costs and lift profits next year. He also may restructure how GE Digital operates, bring in more partners and possibly sell a minority stake in the unit, they told Reuters.
“There was a lot of money spent on Predix,” said a former senior financial executive at GE who worked with Flannery. “They are going to tighten the grip and ensure there’s a return.”
GE declined to comment on Flannery’s plans.
‘Endless Checkbook’
Immelt was among the first executives to spot the industrial Internet wave nearly a decade ago, and positioning the company to catch it became one of his signature strategic moves in his 16-year stint as chief executive.
“This is an all-encompassing change,” Immelt said last year, as GE increased its digital investment.
Analysts and investors see potential for Predix to deliver substantial sales and profits. It already has attracted some large customers, including power utility Exelon Corp. and elevator maker Schindler Holding AG, and orders rose 24 percent to $2.3 billion in the first half of 2017.
But some analysts and investors say the business has taken longer than expected to mature, and its current growth rate is too slow to hit GE’s $12 billion target by 2020. Spending also soared under Immelt, which weighed on profits.
“He gave Bill Ruh an endless checkbook,” Nick Heymann, an analyst at William Blair & Co., said of Immelt.
Case in point: GE has budgeted $700 million more in digital spending this year – to a total of $2.1 billion – to further develop Predix and its applications, and to boost sales efforts. GE executives noted this is likely to mark the peak for digital investment.
GE Digital CFO Khozema Shipchandler said the 2020 revenue target is within reach since recurring Predix subscriptions “pile on significant revenue as time goes on.”
