IBM (NYSE:IBM) derives the bulk of its value from its middleware software and technology businesses, which respectively make up 45% and 24% of the firm’s equity value by our estimates. Business services is IBM’s third largest division and makes up 16% of the firm value. IBM’s competitors span a broad range and include firms like Oracle (NASDAQ:ORCL), HP (NYSE:HPQ), EMC (NYSE:EMC) and Red Hat.
We have a $186 price estimate for IBM’s stock, about 10-15% above market value.
About IBM’s Business Services
IBM’s business services division provides consulting and systems integration along with applications management services.
Consulting and systems integration cover services like client relationship management, business strategy, supply chain management and also solutions to streamline the IT infrastructure and software.
Application management services helps corporate clients reduce IT costs by outsourcing the steps of developing and maintaining software applications used in the client’s business.
Application management outsourcing includes processes such as:
- Software application development
- Software application testing
- Software upgrades, enhancements and maintenance
Key Drivers of Business Services Profitability
1. Global Business Services Revenues from Backlog
2. Global Business Services EBDTA Margin
Below we highlight each of these key drivers in greater detail.
1. Global Business Services (GBS) Revenues from Backlog
GBS revenues for a future year are a function of the outsourcing services contract signings of the previous year and the total backlog of outsourcing services contracts. The majority of revenues delivered in a particular year are due to work under contract in the backlog. Backlog for the next year is calculated as the current year’s backlog plus current year’s signings minus revenues.
GBS backlog increased significantly in 2009 to $44 billion driven by both new contract signings as well as a decrease in backlog delivered to 24%.
In 2010, GBS backlog increased further to $45 billion while backlog delivered decreased towards 22%. Going forward, we estimate further growth in backlog revenues. See more…
2. GBS EBTDA Margin
Business services EBTDA margin increased steadily from about 11% in 2006 to 18% in 2010 due to strong revenue growth and cost efficiencies within the company.
Going forward, we expect GBS EBTDA margin to remain constant at recent elevated levels. See more…
