Cloud Deals To Boost IBM’s Global Services Revenues

IBM (NYSE:IBM) has been systematically reducing its dependence on hardware business and increasing its focus on cloud computing services. Its cloud solutions address the full scope of client requirements including private clouds, public clouds and hybrid clouds, as well as PaaS- and SaaS-based solutions (i.e., platform- and software-as-a-service). The company has been promoting its cloud services amongst its existing client base. This strategy seems to be reaping benefits as the company has signed multiple billion dollar deals over the past month. In this note, we will explore the cloud market and the deals signed by IBM.

See our full analysis on IBM

Cloud Service On The Rise

Over the past few years, cloud services have come to fore for both large and SME (small and medium size enterprise) companies that are looking to improve their businesses by outdourcing IT solutions and services. The advantage of cloud services is the scalability and accessibility to new applications, resources and services. Furthermore,  the costs associated with using these services are less, as the onus of management of these services lie with the cloud services provider. As a result, the demand is growing for virtualization services, which enable service provider to create virtual computer domain independent of the underlying software and hardware, so as to increase manageability and reduce cost. This has translated into a CAGR of 17.6% from 2014 to 2020 for the global cloud services market, and expected to reach a market size of $555 billion in 2020 from $209.9 billion in 2014, according to the new report by Allied Market Research. ^[1]

According to IDC, SaaS will achieve a compound annual growth rate (CAGR) of 24% through 2016. ^[2] Furthermore, IDC expects the Infrastructure-as-a-Service (IaaS) market to grow from $12 billion in 2012 to over $38 billion by 2016. Gartner predicts that IaaS will achieve a compound annual growth rate (CAGR) of 41.3% through 2016. However, the total addressable market (TAM) for cloud services is estimated to be around $200 billion. ^[3]

The deals

In the past month, IBM has signed three multi-billion dollar deals in the European region. This indicates that Europe is warming up to the new age IT services, and the pent up demand is being met by cloud computing. IBM is focusing on hybrid clouds, which blend together on-premise computer systems with public Internet, mobile, and analytics systems, that allow clients to move their legacy systems to the cloud at their own pace.

In November, Deutsche Lufthansa AG announced it has signed with IBM in a seven-year outsourcing deal worth $1.23 (€1) billion that will cover the management of the company’s datacenters and IT services. Over the course of the deal, IBM will help the company to develop new solutions that include business analytics, mobile and cloud computing services. Furthermore, as part of the outsourcing deal, IBM will manage Lufthansa Systems’ entire datacenter operations, help desk and printer services along with individual infrastructure services. ^[4] In the second deal, which was signed on December 1^st, IBM signed a 10-year multi-billion dollar deal with Dutch bank ABN Amro  to provide IaaS. ^[5] On Tuesday, IBM announced that it had won a seven-year, $1.25 billion deal with WPP, the world’s top advertising firm, to run WPP operations in the cloud.

Cloud Deals To Boost GTS And GBS Businesses

Cloud services are transforming business solutions globally and companies are leveraging technology to offer new and improved services across traditional and new channels. IBM has spent billions of dollars building its cloud business globally with 16 acquisitions in the past years that include Trusteer, Softlayer, Keneax, DemandTec and Sterling Commerce, etc.  In sum, it has invested over $7 billion to build a high value cloud portfolio. Furthermore, it has recently launched IBM Cloud Marketplace, and increased its worldwide cloud data centers to forty. ^[3] As a result, the company is well placed to leverage its cloud offering to boost revenues for Global Technology Services (GTS) and Global Business Services (GBS).

IBM’s GTS and GBS divisions together make revenues of nearly $57 billion and account for 32% of its estimated value. In the past few quarters, IBM’s cloud initiative reported growth of over 70% and is the primary reason for IBM’s revenues stabilizing in its technology and global business services division. IBM projects that cloud services will generate $7 billion in revenue by 2015, but we estimate that the top line will be meaningfully higher due to the deals and acquisitions IBM has undertaken in the past few quarters. We expect that most of the gains in GTS and GBS revenue in the future will come from growing cloud services. Currently, we forecast that GTS revenues will grow to $42 billion and GBS revenues will grow to $24 billion by the end of 2020.

We currently are restructuring our model to reflect the chang (sale of Semiconductor Fabrication unit) in IBM’s revenues. At present, we have a $227 Trefis price estimate for IBM which is about 38% higher than the current market price.

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1. Global Cloud Services Market is Expected to Reach $555 Billion by 2020, July 2 2014, www.bizcloudnetwork.com [↩]
2. Worldwide SaaS and Cloud Software 2012–2016 Forecast and 2011 Vendor Shares, August 2012, www.idc.com [↩]
3. Why IBM for cloud? [↩] [↩]
4. Lufthansa signs $1.25 billion outsourcing deal with IBM, November 18 2014 [↩]
5. IBM Signs 10-Year Multi-Billion Dollar Cloud Deal With ABN Amro [↩]