Growing Demand for Business Analytics Software Will Benefit IBM

Includes: IBM, ORCL
by: Trefis

IBM (NYSE:IBM), which competes with Red Hat and Oracle (NASDAQ:ORCL) in the Middleware Software business, reported 11% year on year growth in its software revenues for the first quarter of 2010, led by strong demand for its business analytics portfolio. We have updated Trefis price estimate for IBM’s stock from $164 to $175, in part to reflect higher growth for IBM’s middleware division driven by demand for its business analytics software.

Business Analytics software such as SAS and IBM’s Cognos make extensive use of statistical and quantitative analysis to help companies with a) understanding the current business trends and b) gaining insights into future trends using predictive modeling.

With growing use of analytic tools by companies to boost sales and overall performance, we expect IBM’s information management software revenues to increase. Below we discuss the importance of information management software to IBM’s middleware revenues, and how increasing demand for business analytics software will benefit IBM.

Middleware Software Is 45% of IBM’s stock

We estimate that the Middleware business constitutes 45% of the $175 Trefis price estimate for IBM’s stock. IBM typically earns three types of revenues from its middleware business: license revenues, maintenance fees, and service fees.

Information Management Software Generates 40% of IBM’s Middleware Revenues

IBM’s Business Analytics software essentially comes under its information management software group that includes solutions such as Enterprise Content Management, Data Management, Information Integration and Cognos Business Intelligence and Performance Management.

We estimate that the information management software group contributes about 40% to IBM’s middleware revenues, much higher than the contribution of its other key software like Websphere, Lotus, Tivoli and Rational.

Due to increased demand for IBM’s business analytics software, we expect IBM’s middleware license revenues to grow by 15% in 2010 as against 1% growth registered in 2009.

IBM Will Continue to Benefit From Increasing Business Analytics Demand

Each company, big or small, requires comprehensive future planning to come up with strategic business decisions that will help it drive up sales, and business analytics software is designed to help make more informed decisions.

IBM saw 11% year on year growth in its software revenues for the first quarter of 2010, mainly led by demand for its business analytics software like Cognos, and we expect this trend to drive growth for IBM’s middleware division.

You can modify our forecast above to see how IBM’s stock price will be impacted if its middleware revenues were to grow faster than we expect due to more demand for its information management software.

Disclosure: No positions