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Investment Overview for IBM (NYSE:IBM)
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Below are key drivers of IBM's value that present opportunities for upside or downside to the current Trefis price estimate for IBM:
Middleware Software
- IBM Middleware License Revenues: We currently forecast the revenues from the sale of IBM's middleware licenses will increase from about $6.4 billion in 2012 to over $8.5 billion by the end of the Trefis forecast period. However, there could be a 5% downside to the Trefis price estimate if middleware license revenues increase at the lower rate reaching close to $7 billion by the end of Trefis forecast period.
- IBM Middleware Software EBITDA Margin: We currently forecast middleware software EBITDA margin to decrease from about 43% in 2012 to nearly 41% in 2013 and then remain constant till the end of the Trefis forecast period. There could be 4% upside to the Trefis price estimate if margin were to remain constant at current high level going forward. On the other hand, there could be 5% downside to the Trefis price estimate if the margin continued falling, reaching its pre-crisis level of 35% by the end of the Trefis forecast period.
Business Services
- GBS EBITDA Margin: GBS margins have historically witnessed solid growth increasing from 12.5% in 2007 to around 16.4% in 2012. While we currently forecast GBS EBITDA margin to remain constant at current high levels in the future, a decline in the future to pre-recession level of 12.5% could result in a significant downside of 3%-4% to the Trefis price estimate.
- GBS Revenues from Backlog: We currently forecast that the IBM's Global Business Services revenues from backlog of service contracts to increase from an estimated $10 billion in 2012 to about $15.0 billion by the end of the Trefis forecast period. There could however be a 2% downside to the Trefis price estimate if GBS revenues from backlog were to remain constant going forward.
For additional details, select a driver above or select a division from the interactive Trefis split for IBM at the top of the page.
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IBM makes money primarily through the sale of middleware software and technology services such as outsourcing and integration. IBM's customers are large and medium sized businesses worldwide.
Middleware is a portfolio of software products used to build and deploy software applications. Middleware acts as an interface between front end applications like web based applications and back-end applications like the database. Examples include database systems, telecommunications software, transaction monitors, and messaging and queueing software.
IBM, Red Hat, and Oracle Corporation are major vendors providing middleware software.
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We believe that Middleware is the most valuable segment within IBM due to:
High Middleware Margins
IBM has typically enjoyed higher margins on its middleware software business as compared to its other major business segments. As a result middleware software has proved to be the most valuable business for the company by far.
We estimate that IBM's middleware software division will have EBITDA margins of over 40% during our forecast period. In comparison, we estimate that the businesses within Technology Services will have EBITDA margins of about 20% and Business Services will have EBITDA margins of about 16% over the forecast period.
Recurring Middleware Software Revenues
Much of IBM's middleware software business is based on recurring maintenance and services revenue streams as contracts are often renewed on expiry. We believe IBM would be able to maintain steady cash flows, even in tough times, in a segment where it is the market leader.
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Business Analytics and Optimization
Global data volume is expected to increase by 29 times over the next 10 years to 35 zettabytes, according to research firm IDC. (A zettabyte is a 1 followed by 21 zeros.) With enterprises needing a way to manage and mine potentially valuable information from this huge source of data, advanced data analytics will witness increased adoption.
IBM has built the world’s leading analytics practice. With more than 500 analytics patents and several acquisitions the firm has extended its capabilities beyond any other player in the market. IBM expects analytics solutions to contribute a mammoth $16 billion to its revenue by 2015, providing a significant boost to both its middleware software and services offerings.
Smarter Planet Initiative Offers Tremendous Potential
IBM launched its smarter planet initiative in 2008 to provide new ways of monitoring, connecting, and analyzing the systems allowing business, civic and nongovernmental leaders to develop more efficient ways to manage these systems.
The firm aims to capture new and potentially huge markets (like utilities, e-commerce etc.) by offering solutions that will essentially be integrated with its middleware software platforms.
If IBM manages to successfully extend its software and solution offerings leveraging its Smarter Planet initiative, its middleware software business could witness tremendous growth in the future.
Strategic Outsourcing To Benefit from Cost Cuts and Increased Competition
Strategic Outsourcing Services of IBM are aimed at enabling clients to reduce costs and improve productivity and efficiency. Strategic Outsourcing forms almost 53% of the Global Technology Services (GTS) revenues and 33% of Overall Global Services revenues. We believe that as economy recovers, Strategic Outsourcing will continue to remain important as companies look to cut costs and improve productivity in an increasingly competitive environment.
Trefis Forecast Rationale for IBM Middleware License Revenues
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Software revenues typically split into License, Maintenance and Services revenues. License revenues are sales of licenses of software to clients to use it for a specific period of time.
Typically, for mature companies like HP and IBM, the software revenues split up as
- License Revenues: 30%
- Maintenance Revenues: 45%
- Services Revenues: 25%
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${forecast} saw heady annual growth of over 10% during 2006-08 reaching over $5 billion driven primarily by sale of WebSphere as IBM gained market share to become the number one player in the middleware software market.
In 2009, the growth in ${forecast} decreased to just 1% as the US economy went into recession and businesses cut down on their IT spend resulting in lower growth in license revenues. The fact that IBM managed to grow during the period speaks loads about the dominance of the firm in the middleware software market.
In 2010 ${forecast} increased to $5.5 billion driven primarily by the acquisition of Sterling Commerce in August 2010 which contributed $350 million in revenues.
In 2011, it jumped to $6.3 billion as Sterling Commerce's full year revenues were taken into account.
In 2012, it remained flat at $6.4 billion.
Going forward, we expect ${forecast} to grow at a mid single-digit rate driven by growth in WebSphere and Information Management software. We also expect growth in Lotus, Tivoli and Rational software of the company.
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We consider the following factors in our forecast:
- Websphere Software
- We believe that Websphere is a key element in the IT infrastructure of a company and it will continue to grow at a healthy rate as firms spend on IT to improve their processes and remain competitive as the economy recovers.
- Acquisition of Sterling Commerce, which creates software and services to help companies transfer electronic documents securely amongst them, has also helped create additional revenue opportunity for IBM and will continue to do so. Sterling Commerce, which is integrated with IBM's Websphere group, has about 18,000 customers and manages more than a billion transactions among its clients.
- Information Management Software
- IBM is the market leader in the integration and information access market according to IDC. Gartner also suggests that IBM has the strongest vision in the market when you look at Gartner’s magic quadrant
- IBM's Smarter Planet initiative aims to help organizations make better informed decisions based on the data sampling and case based analysis using the huge amounts of data available from their processes. We believe this will provide boost to IBM's information management business going forward.
- With information management becoming key as companies strive to manage more information and data in their systems, we believe IBM, being the market leader, will exhibit strong growth in the field.
We also expect growth in Lotus, Tivoli and Rational going forward.
- Lotus Software
- Lotus has witnessed rapid growth before the economic downturn. Since it is only a enterprise platform and not a critical component of running a business, companies avoided to sign new licenses during the downturn. However we expect it to grow once again going forward as the economy environment improves.
- Tivoli Software
- Tivoli is a storage and operation software and witnessed strong growth in the past. We expect it to grow strongly in the future as well.
- Rational Software
- Rational is a software that aids in software development and hence is not strictly a business critical software. Its growth suffered during the economic slowdown before increasing back in 2010. We expect it to grow in the future as well.
Back to Company OverviewHow Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on:
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