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Investment Overview for IBM (NYSE:IBM)
Below are key drivers of IBM's value that present opportunities for upside or downside to the current Trefis price estimate for IBM:
- 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 $7.13 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 were to remain flat at $6.4 billion by the end of Trefis forecast period.
- IBM Middleware Software EBITDA Margin: We currently forecast middleware software EBITDA margin to decrease from about 49% in 2012 to nearly 46% 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.
- GBS EBITDA Margin: GBS margins have historically witnessed solid growth increasing from 12.5% in 2007 to around 17.2% in 2012. While we currently forecast GBS EBITDA margin to stabilize at 16.7% 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 $13.0 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.
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.
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 21% and Business Services will have EBITDA margins of about 17% 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.
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 and GBS 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.
How 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: DCF Methodology
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