International Business Machines (NYSE:IBM) has launched a new global initiative to tap into a rapidly growing “third platform”, which consists of cloud services, mobile computing and big data analytics. IBM made this announcement at its PartnerWorld Leadership Conference 2013.
IBM’s focus on cloud computing and analytics is already paying off as these divisions have seen high revenue growth in recent quarters. We expect these units will continue to drive growth in 2013, and IBM’s focus on launching services based on this third platform will aid growth. According to IDC, worldwide IT spend will reach around $2.1 trilion in 2013, a y-o-y increase of over 5.7%.  IDC has predicted that the primary driver for this spending would be the double-digit growth across third platform constituents. Emerging markets, expected to grow by 8.8% to exceed $730 billion in 2013, will further fuel IT spend. In its 2015 road map, IBM has stated these as the key factors in the overall growth strategy for the company.
New intiatives to improve IBM profitability
IBM, in its 2015 road map, has stated that third platform services and emerging markets will be key drivers for revenue growth. IDC’s prediction for emerging markets growth represents 34% of the expected IT worldwide spending in 2013, and more significantly, it represents 51% of all new growth in the IT. IDC has also projected mobile devices to grow by 20% to reach $413 billion in 2013, 57% of all IT market growth. Cloud computing has popularized Software as a Service (SaaS) and Platform as a Service (PaaS) and continues to complement existing IT solutions in the industry.
IBM has supplemented its product portfolio on the third platform. Some of the recent launches are as follows:
– IBM doc to recapture the lost Lotus notes share in a $7 billion enterprise e-mail market.
– SmartCloud storage that will interact with Tivoli Storage Productivity Center in the background.
– IBM Digital Analytics Technology, cloud-based and helps analyze big data to identify patterns in customer behavior.
– MobileFirst, a mobile solution that combines big-data analytics and cloud computing that will transform the business in emerging markets where poor infrastructure hinders businesses
Some of these new initiatives have started reaping benefits already. For 2012, business analytics revenue grew 13% while Smarter Planet revenue was up more than 25% and cloud revenue jumped nearly 80%. These high growth and high margin businesses explain the jump in IBM’s EPS despite lower y-o-y revenues. Revenues in the BRIC countries — Brazil, Russia, India and China — expanded 7%.
Going forward, IBM can leverage its new initiatives to increase its revenues across different divisions. Currently, storage services account for $3.6 billion of IBM’s revenue. With the new launch, SmartCloud Storage, IBM offering in its storage services to IT and non-IT departments has surpassed conventional storage services. Moreover, cloud storage is a cost effective solution for the emerging market.
Storage services to emerging markets are expected to see good growth in the coming year and will help IBM in stemming a decline in the division revenue. With the launch of big data analytics over cloud, IBM stands to grow its revenue in Global Business Services. GBS reported $18.6 billion in revenues for 2012. This segment contributes 17% to the top line of IBM and has seen growth in the previous fiscal year.
With new launches and initiatives, IBM can generate new revenue stream with new buyers such as the CFO, CMO. This will give a boost to GBS, and we expect that its contribution to the top line will increase gradually over the next seven years. The new initiatives on the third platform such as MobileFirst also supplement Middleware software business in device management, analytics and application development. Many of these services can be offered as SaaS or PaaS over cloud. We expect that the new initiatives in mobile computing will aid IBM in recouping the flagging revenue in middle-ware software division and increase sales through the integration of various offerings.
We currently have a $215 Trefis price estimate for IBM, which is about 5% higher than the current market price.Notes: