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GE Finance Chief Sees Digital Growth Accelerating Past 2020
General Electric Co. is on track to triple the size of its software business by 2020. If you ask GE’s finance chief, that may be just the beginning.
The digital operations may generate $15 billion in sales by the end of the decade, potentially making GE one of the largest software companies in the world, Chief Financial Officer Jeff Bornstein said in an interview at the company’s software center in San Ramon, California. The company is investing more than $1 billion this year and hiring aggressively to capture more of a market that may surpass $225 billion by 2020, he said.
“I think you accelerate from 2020,’’ Bornstein said. “If this is what we think it is, then the mass adoption happens post-2020.’’
GE sees its digital operations as an essential complement to its 124-year-old manufacturing business, allowing the company to adapt old-school machinery for the 21st century. By using software and sensors, GE hopes to boost the efficiency and reliability of equipment such as gas turbines and jet engines.
The company also sees significant potential from its Predix operating system, a platform that can be used to build applications and enhance products made by GE as well as by other companies. Sales from Predix will be about $4 billion in 2020 from “virtually zero’’ today, Bornstein said.
The finance chief and leaders from GE Digital were hosts to investors Thursday at the San Ramon outpost, on the edge of Silicon Valley, for the first detailed breakdown of the software operations.
“This is a business, it’s not just a productivity improvement tool,” said Nicholas Heymann, an analyst at William Blair with an outperform rating on GE. “It actually creates tangible sales and very high-margin earnings. Right now most people don’t have the concept that this is anything more than cotton candy.’’
GE rose 1 percent to $31.08 at 2:41 p.m. in New York, leaving the shares little changed for the year.
Expanding the digital business is central to Chief Executive Officer Jeffrey Immelt’s dramatic overhaul of GE. He has sold the bulk of the GE Capital finance arm and the home-appliances business while narrowing the Fairfield, Connecticut-based company’s focus on industrial manufacturing and the complementary software business. He also is moving the company’s headquarters to Boston, in part to tap the city’s research capabilities and tech-savvy workforce.
GE’s digital operations could account for about 25 percent of the company’s earnings in the coming years, Heymann said. While Bornstein wouldn’t say how large a proportion of GE the digital business could become, he said it “could be enormous.”
GE telegraphed its digital ambitions in 2011 with the hiring of Bill Ruh from Cisco Systems Inc. and the decision to open the San Ramon office. Ruh became CEO of GE Digital when the business was formally launched last year.
Having several years of experience as many industrial peers are just starting to pursue their own digital strategies gives GE “first-mover advantage,’’ Ruh said at Thursday’s investor meeting.
Building a software franchise from scratch — and taking on tech giants such as Microsoft Corp. and International Business Machines Corp. — isn’t without obstacles. Neither is competing in Silicon Valley.
“One of the challenges for GE is to build credibility in software-engineering circles so that college graduates think of that as an exciting job,’’ said Philip Levis, a computer-science professor at Stanford University.
GE executives say the company is having success hiring top talent, including several engineers who helped develop Apple Inc.’s voice-activated assistant, Siri. Headcount at the San Ramon center has grown to 1,400 from 750 at the end of 2013, helped by tongue-in-cheek television advertisements showing a nerdy-but-hip young man surprising friends and family by choosing to write code at GE.
“We’ve really had to work on the brand,’’ Jen Waldo, the senior human-resources manager for GE Digital, said at the meeting. When GE started recruiting potential employees a few years ago, “about 90 percent of them didn’t even know GE built any kind of software, so we had to get much smarter about our brand and much more sophisticated about our recruiting.”
GE Digital, which has about 28,000 global employees, plans to hire 2,000 new workers by year-end, she said.
The company has agreements with technology giants such as Intel Corp. and Cisco to bolster development of cloud capabilities, apps and other aspects of the Predix system. GE said it hopes to have more than 50 partners by the end of the year, from 31 today.
Digital orders are on pace to exceed $7 billion this year with growth of 30 percent to 40 percent in almost all divisions, according to Deane Dray, an analyst at RBC Capital Markets. While many industrial companies are developing complementary analytics businesses, GE “clearly has a head start in this sector-wide gold rush,” he said in a June 16 note.
“Over the past year, it has become abundantly clear that building out digital/software capabilities is among GE’s highest priorities,” Dray wrote. With few exceptions, he said, “GE’s digital business strategy is the most ambitious” among industrial peers.
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