IBM Cloud Services Part-II

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IBM: International Business Machines logo
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International Business Machines

In our previous note (the first in a two-part series), we looked at some of the trends in cloud computing. To recap, cloud computing is expected to grow at a robust pace in the next five years. The primary drivers for this growth are the cost benefits of outsourcing the hardware and software required for technology-based services, which in turn depends on the state of the global economy. Cloud-based services comprise Software as a Service (SaaS), Platform as a Service (PaaS) and Infrastructure as a Service (IaaS) and all three are projected to experience healthy demand. International Business Machine (NYSE:IBM) announced at a recently concluded shareholders meeting that it was investing $4 billion in key strategic areas, including  the cloud, big data analytics, enterprise mobile, and security.  It also said that these businesses will grow from $25 billion (27% of total revenues) to over $40 billion (40% of its expected revenues) by 2018. [1] While we continue to monitor other growth businesses (big data analytics, Enterprise mobile & social, computer security) of IBM, in this note we will look at its cloud offering.

See our complete analysis of Microsoft here

IBM Cloud Offering

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While IBM’s revenues from growth businesses (Big data, cloud, mobile & security) increased by 16% year over year in 2014, cloud services revenues grew by 60%. According to IDC, public cloud spending is expected to grow to $127.5 billion 2018 from $56.6 billion in 2014. It estimates that SaaS spending will increase to $82.7 billion, while IaaS and PaaS expenditure will grow to $24.6 billion and $20.3 billion respectively. [2] Considering the expected growth in cloud services over the next 4 year, IBM has intensified its efforts to get a bigger chunk in the cloud market. IBM’s smart cloud solutions cater to all the three verticals of cloud offering. It also offers private, public and hybrid cloud capabilities together with security and deployment consulting services. All of IBM’s cloud offerings are accessible through its marketplace. A gist of some of its offerings are as follows:

  • Business application SaaS: For the business application vertical, IBM has 120 offerings that cover a large gambit of capabilities.IBM SaaS not only covers big data analytics and marketing but also outsourcing services such as HR administration. For improving digital customer experience, IBM offers Silverpop Engage, while it offers Digital Analytics to analyze visitor’s behavior across multiple marketing touch points and channels. Furthermore, IBM is offering Watson for big data analytics and developer cloud for applications across industries such as healthcare and retail, and organizations to automate data preparation.
  • Developer Service (PaaS): IBM is offering the Bluemix platform that offers a developer a single solution environment to develop and deploy apps across multiple domains. Within this segment. IBM’s PureApplication Service on SoftLayer help’s developer provision, deploy, monitor and scale development and test  traditional workloads with both the rental economics of public cloud and the isolation of private cloud soft cloud.
  • Infrastructure as a Service: IBM offers a choice of open cloud infrastructure services for IT operations. However, its lead IaaS services are based on SoftLayer global cloud infrastructure. SoftLayer provides different machine virtualization services that runs both advance operating systems and analytics software. Furthermore, it provides cloud storage solutions that encompass object storage, network storage and mass storage servers. The company uses a pay-as-you-go model for pricing its IaaS services through which a client only pays according to the usage of services.

IBM’s Cloud Strategy

Currently, IBM generates $93 billion revenues annually. Most of its software revenue stems from sale of perpetual middleware software licenses (such as Rationale, Rose, Websphere), though it also offers Global technology services that includes outsourcing, etc. However, over the past few years a host of factors have forced IBM to extend its services in the cloud domain. While declining demand for hardware and the associated Enterprise software is one such factor, other factors include price sensitivity of clients that want to cut down their costs and only pay for services that are rendered, based on the scale of operations. As a result, IBM has adopted a cloud first strategy to bolster its revenue. As a result, in 2014, IBM generated $7 billion in cloud revenue in 2014, a 60% gain from a year earlier, and is pushing its hybrid cloud model in order to boost competitiveness. Research firm Gartner expects half of all U.S. companies will use hybrid installations by 2017. Therefore, IBM’s offering in Hybrid cloud should boost its revenue in the future.

IBM’s vision of cloud services allows customers to subscribe to not only standalone applications, but also to interact seamlessly with Softlayer’s infrastructure (and IBM servers and storage) and on-site applications as well as SaaS offerings. Over the past few years it has invested close to $1.2 billion to expand its global footprint in 40 cloud centers accessible to every major financial market around the world  New York, Frankfurt, Mexico City, Tokyo, Mumbai, London, Amsterdam, Beijing, Hong Kong, and more. It has also invested $1 billion to develop the Bluemix platform (PaaS) to help developers and clients create cloud applications. As a result, it has signed more than $4 billion in multi-year enterprise cloud agreements with Fortune 500 companies. Furthermore, according to a Synergy research group’s report published in Q3 2014, IBM ranks as the No. 3 cloud player with a market share of 7%, and is gaining share at a growth rate of 136%. [3] Synergy research also said that cloud infrastructure services revenue had exceeded $14.5 billion in trailing-12-month revenue, with annualized growth of nearly 50% year over year.

IBM is trying to close the gap between itself and other cloud leaders (Amazon and Microsoft) by rapidly introducing new products, especially over the hybrid cloud, and cutting prices. Last year in June, IBM cut prices for its SoftLayer storage service by up to 60% in response to a wide range of Amazon’s AWS price cuts of between 28% and 61%. We believe  that IBM can leverage not only its brand, but its existing customer relationships, history of running global-class consumer Internet properties and its engineering prowess to sell its cloud Saas, IaaS and PaaS services. If this were to happen, and IBM’s share were to increase 10% of cloud (estimated at $200 billion by 2018), then IBM’s revenues would  increase from $7 billion to over $20 billion by 2018. This could result in a 15% upside to our current price estimate.

We currently have a $197 Trefis price estimate for IBM, which is about 18% higher than the current market price.

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Notes:
  1. Sec Filings, 26th February 2015 []
  2. Forecasts Call For Cloud Burst Through 2018, November 3 2014 []
  3. Microsoft Cloud Revenues Leap; Amazon is Still Way Out in Front, October 29 2014 []