IBM Falters In Attempt To Join The Big Three Cloud Service Providers
- IBM enters the cloud services market to compete with Amazon, Microsoft and Google.
- Competition on the public cloud is fierce with many competitors.
- IBM does not do well in a competitive environment and has too few servers to compete with the big three.
- The IBM story has dozens of moving parts and can't be understood based on headline figures.
- In this article, I present a deeper analysis of IBM's segmented revenue data, which will reveal several surprising facts.
- Both the bull and the bear camps are wrong in at least one part of their analysis.
- Finally, we will understand why the usual focus on top line growth totally misses what's really going on inside Big Blue.
- IBM is undervalued at 8.7X its expected 2016 operating EPS.
- IBM abandoned its insane Roadmap 2015 program which pushed for breakneck EPS growth at the expense of growing and building its business.
- IBM generated solid revenue growth (16%) from its strategic product, service and solutions offerings.
- IBM has institutional support: Warren Buffett, Prem Watsa and Loomis Sayles' Dan Fuss own IBM shares.
- Hewlett-Packard split itself up and IBM should consider doing the same if it can't revive its growth momentum.
IBM Earnings: Revenues And 2015 Guidance Disappoints As Restructuring Continues
- IBM continued to report a marked slowdown in business due to weak client spending, anemic demand in the software sector and divestitures of sizable businesses.
- The company reported 12% a year-over-year decline in revenues to $24.1 billion.
- We are in the process of updating our IBM model. At present, we have a $204 Trefis price estimate for IBM.
Why IBM Is Better Than I Thought, But I'm Still Bearish
- Early in the fourth quarter, I went bearish on IBM because the constant declines in revenue were simply too much.
- Management states it is transitioning to a higher-value business, but I was not convinced.
- I discounted FCFE to establish PV of the firm using the LIBOR forward rate curve.
- The results were different from my expectations.
- IBM has repurchased over $100 billion in its own shares since 2004 (about two-thirds of its own market cap).
- Given the large size of IBM's share purchases, it's worthwhile to examine whether the buybacks have created value for IBM shareholders.
- My analysis suggests that IBM's buybacks neither created nor destroyed value from 2004 to 2013.
- A flood of special charges makes it hard to understand IBM's underlying business performance.
- A detailed cash flow analysis shows that IBM does somewhat better than it seems at first sight.
- However, it is also more clear than ever that Big Blue's transformation has still not ended.
- IBM's Q4 and full-year earnings were horrible, to say the least, showing declines in just about every large area of the business.
- The company also gave investors two reasons to believe a turnaround might actually occur.
- While IBM's stock might suffer short-term, the long-term benefits from these two factors could create a good long-term investment opportunity.
IBM: Attractive Entry Point Despite Weak Earnings And Guidance
- IBM reported worse than expected Q4 earnings and the full-year guidance for 2015 was below consensus as well.
- Given IBM's poor operational and financial performance in the past years, investors should be conservative with the company's future growth prospects.
- Using a DCF valuation model, I find that IBM trades below its fair value based on a non-growth scenario.
- Even a small upward revision of the growth scenario leads to a decent upside potential for this stock.
- IBM sold off after another disappointing earnings report. Investors sold the stock because the company missed analyst estimates on revenue and handed in a weak outlook.
- But it's foolish to play the expectations game. IBM is making important progress that analysts are not giving it credit for. IBM's turnaround looks to be for real.
- IBM is back to earnings growth, and assuming continued progress in high-growth areas, IBM offers a lot of value at such a cheap valuation.
- IBM's Q4 report saw an impressive EPS beat, but really very few other bright spots.
- Buybacks were virtually halted as the stock tanked, an incredible development from a company that has made its living retiring shares.
- I still think IBM is a short as the business continues to shrink and there is no direction from management.
- IBM announced full-year 2014 earnings results.
- The lack of revenue growth continues to be the central theme.
- However, if you believe in the company’s ability to start growing – even slightly – the investment thesis remains reasonable.
What The Whisper Number Indicates For IBM Earnings
- The whisper number is $5.42, in-line with the analysts' estimate.
- IBM has a 67% positive surprise history (having topped the whisper in 40 of the 60 earnings reports for which we have data).
- The overall average post earnings price move is 'positive' (beat the whisper number and see strength, miss and see strength) when the company reports earnings.
- Analyzes IBM for both the conservative as well as the more aggressive/buy & hold investor.
- Performs a complete historical free cash flow analysis (1990-2015) using our "Scorecard System".
- Expects IBM to miss and guide lower for 2015 and explains why.
- IBM is a value play.
- The shares have under performed the market for the past two years.
- To further compound matters, the shares lost ground in 2014, angering many investors.
- I have decided to reinvest in the shares as will be outlined below.
- IBM has worked hard to save both its company and stock over the last few years.
- Unfortunately, a rapid decline in free cash flow will prevent the company from buying back stock and making acquisitions at a pace investors have come to expect.
- The outcome will be accelerated stock losses in 2015.
- If IBM doesn't change the way it operates, the stock might perform OK this year, but long-term losses could be very significant.
- IBM's mainframe - system z - revenue is cyclical, peaking after periodic upgrades, then tailing off.
- The company has just introduced the z13, touting it as the most powerful and secure system ever built.
- A review of the prior cycle provides insight into the current possibilities.
- If results parallel the previous cycle, IBM may resume growth.
- IBM now sells for less than 10 times earnings and 1.5 times sales.
- HP shareholders have prospered under Meg Whitman despite a lack of growth. Why can't IBM do the same?
- The militarization of cyberspace could move a lot of business Big Blue's way this year.
Sun, Jan. 18, 12:57 PM
- TechCrunch reports Google (NASDAQ:GOOG) is interested in acquiring Softcard, the mobile payments platform launched by AT&T (NYSE:T), Verizon (NYSE:VZ), and T-Mobile (NYSE:TMUS) in 2010 - it was previously known as Isis, before changing its name for obvious reasons. Though Softcard's owners have invested hundreds of millions in the venture, sources state Google's purchase price could be below $100M.
- Like Apple Pay and Google Wallet, Softcard relies on NFC radios to enable transactions. And like Wallet, it has struggled to get off the ground, as U.S. consumers overwhelmingly stick with card swipes. Hard data on Apple Pay usage remains limited for now.
- Softcard recently laid off 60 employees. Meanwhile, it was reported in 2013 that Google had spent $300M on Wallet-related acquisitions, with little to show for it. The adoption of EMV (chip-and-PIN) readers by U.S. retailers could give NFC solutions a boost, by making card payments a little less convenient.
- The WSJ reports Google is partnering with consulting giant PwC to bid on a $2B+ contract to update the DoD's electronic health records system. PwC says Google's tools could both improve the system's security and performance, and lower costs. A group featuring IBM, HP (NYSE:HPQ), and CSC has made a rival bid.
- Ad tech firm Marin Software (NYSE:MRIN) provides some encouraging mobile search data ahead of Google's Jan. 29 Q4 report. A Marin study found mobile accounted for 49% of Q4 U.S. search ad spend, up from 42% in Q3, and that smartphone ad click rates were 38% higher than PC rates (thanks in part to accidental clicks?). On the other hand, mobile still only accounted for 32% of conversions.
- Medium writer Backchannel provides a deep dive into Google Search's evolution in an era where users increasingly want search engines to know the precise meaning of their queries. Part 1 looks at Google's efforts to optimize for mobile (aided by its Knowledge Graph and Google Now). Part 2 looks at Google's real-world research into the information needs of users. Part 3 looks at Google's investments in A.I./deep learning to deliver far more intelligent search results and spontaneously surface useful information.
Oct. 22, 2014, 4:15 AM
- Lufthansa (OTCQX:DLAKY) is close to selling its IT infrastructure unit to IBM (NYSE:IBM), including an outsourcing agreement for the services, as part of a restructuring to better position itself to compete with low-cost carriers and Gulf rivals.
- The move will reduce Lufthansa's annual IT costs by around €70M a year, but will result in a €240M ($305.2M) charge this year.
- Under the planned deal, Lufthansa will outsource all of its IT infrastructure services to IBM under a seven-year agreement. A final price for the sale is still being negotiated.
Oct. 20, 2014, 1:40 AM
- IBM (NYSE:IBM) has reached an agreement with Globalfoundries to take over its loss-making semiconductor unit, WSJ reports.
- Under the terms of the deal, IBM will pay Globalfoundries $1.5B to take the chip operations off its hands, a source says.
- IBM is scheduled to report Q3 earnings premarket.
- Previously: IBM to make 'major announcement,' release earnings Monday morning
Sep. 29, 2014, 2:00 AM
- Lenovo (OTCPK:LNVGY) will complete its $2.1B acquisition of IBM's (NYSE:IBM) x86 server unit on Oct. 1, giving China's biggest personal computer maker a major asset to expand its business client offerings.
- The closing purchase price is lower than the $2.3B valuation announced in January because of a change in the valuation of inventory and deferred revenue liability, says Lenovo.
Aug. 15, 2014, 4:20 PM
- The U.S. Committee on Foreign Investment (CFIUS) has signed off on the $2.3B sale of IBM's x86 server unit to Lenovo (OTCPK:LNVGY).
- The deal had been closely scrutinized due to the division's sales to U.S. government clients, sales which have included a decent number of supercomputer deals. IBM has tried to soothe concerns in part by promising it would continue handling maintenance work on Lenovo's behalf "for an extended period."
- Chinese regulators cleared the deal in July. Ahead of the sale, IBM's x86 server revenue fell 3% Y/Y in Q2, a much smaller decline than Q1's 18%.
Aug. 11, 2014, 11:44 AM
- IBM (IBM +0.7%) has bought Lighthouse Security, a provider of identity/access management software that sets permissions for cloud-based apps, for an undisclosed sum.
- News of the purchase comes two weeks after Big Blue disclosed it's buying CrossIdeas, an Italian identity/access software firm. Whereas CrossIdeas (with the help of an analytics platform) is used to control employee access to a company's internal apps and data, Lighthouse specializes in controlling employee and 3rd-party access to cloud apps, including ones not controlled by the company.
- "If you are on Facebook and LinkedIn and are a customer in my directory, I need to figure out who you are and interact with you in a seamless way," says IBM exec Kris Lovejoy, describing a use case for Lighthouse's software. Lighthouse's products (like CrossIdeas') will be integrated with IBM's existing identity/access management offerings.
Aug. 4, 2014, 6:58 PM
- Bloomberg reports IBM offered Globalfoundries $1B in cash to take the company's struggling chip manufacturing unit off its hands, and that Globalfoundries insisted on getting $2B.
- At issue: The unit is reportedly responsible for up to $1.5B/year in losses to go with its employee obligations, and Globalfoundries is said to assign little value to IBM's fabs. Rather, it's Big Blue's chip engineers and IP that mostly interest the foundry.
- Bloomberg previously reported IBM's talks with Globalfoundries broke down over price, but didn't state Globalfoundries was looking to be paid for making the acquisition. It added IBM was interested in a JV agreement that would allow it to retain control of chip design and IP development.
- Analyst Jim McGregor thinks a deal might still happen. "The first rule of negotiating anything is you need to be able to walk away from a deal ... This might just be posturing. You may see this resurrect itself in three to six months."
Jul. 31, 2014, 1:47 PM
- Italy-based CrossIdeas develops identity/access management security software that uses analytics and a constantly-updating data repository to prevent unwanted access to data and apps. IBM hasn't disclosed the acquisition price. (PR)
- The cybersecurity software space has seen plenty of M&A activity this year, as corporate demand from cybersecurity offering rises in the wake of a series of high-profile attacks. IBM plans to integrate CrossIdeas' tools with its existing identity/access management offerings.
- Security has been a bright spot for IBM: Its total security-related revenue rose 20% Y/Y in Q2, helped a bit by last year's acquisition of threat-prevention software firm Trusteer.
- Gartner estimates Big Blue's 2013 security software sales totaled $1.14B (+19.1% Y/Y), giving the company with a 5.7% share of the market (#3 overall)
Jul. 25, 2014, 3:53 PM
- Bloomberg reports IBM's (IBM -0.5%) talks to unload its struggling chip manufacturing unit to Globalfoundries have ended over differences on price.
- The news service reported in June IBM and Globalfoundries were close to a deal, while adding (citing a source) Big Blue's chip unit has been losing as much as $1.5B/year. Before that, the WSJ reported IBM originally wanted $2B+ for the business, but had seen initial bids closer to $1B.
- The unit's sales fell 18% Y/Y in Q2 amid ongoing share losses to TSMC and other foundry rivals. They fell 16% in Q1, and 33% in Q4.
- Bloomberg states IBM had become interested in a JV arrangement that would allow it to maintain control of chip design and IP development (while ridding itself of manufacturing). Two weeks ago, IBM promised to spend $3B over the next 5 years on advanced chip R&D.
Jul. 4, 2014, 4:42 AM
- Lenovo's (LNVGF) $2.3B deal for IBM’s (IBM) low-end server business has been approved by the the Chinese Ministry of Commerce's anti-monopoly bureau.
- The acquisition is still awaiting approval in the U.S., as the Committee on Foreign Investment in the United States investigates possible American national-security risks under the proposed deal, including concerns of the Pentagon's use of IBM servers.
Jul. 2, 2014, 1:56 AM
- Lenovo (LNVGF) is still expecting to close the $2.3B deal on IBM’s (IBM) low-end server business this year, although the acquisition is still being investigated by the U.S. for national-security risks.
- One of the main concerns is that IBM's x86 servers are used in U.S. communication networks and in data centers that support the Pentagon's computer networks.
- The company is also attempting to obtain regulatory approval to buy Google's Motorola Mobility, in another multi-billion-dollar acquisition valued at $2.9B.
Jun. 11, 2014, 11:22 AM
- Bloomberg's report follows an April WSJ report calling Globalfoundries "the lead candidate" to buy IBM's (IBM -0.6%) chip manufacturing/foundry ops. Notably, Globalfoundries is said to be more interested in Big Blue's chip engineers and IP than its relatively old wafer fabs.
- A source states the unit has been losing as much as $1.5B/year. Its Q1 sales fell 16% Y/Y amid continued share losses to Globalfoundries, Samsung, and foundry giant TSMC (TSM -0.5%).
- Nonetheless, the business claims high-profile foundry clients such as Cisco and Juniper, and has a history of leading the way in mass-producing new chip technologies/materials, such as silicon-on-insulator (SOI) and silicon germanium (SiGe).
- That could help Globalfoundries as it tries to gain ground against TSMC, which has a long list of blue-chip mobile processor, GPU, and FPGA clients.
- The WSJ's report stated the unit has received $1B+ bids - less than the $2B+ IBM was initially seeking.
May. 19, 2014, 6:52 PM
- IBM has bought Cognea, a startup developing virtual assistants that interact with users via A.I.-based personalities. Terms are undisclosed.
- Big Blue plans to integrate Cognea's technology with its Watson A.I. hardware/software, with the goal of allowing Watson to deliver "conversational services." Potential end-markets mentioned by the company include "virtual personal assistants, health coaches, companions for elderly people, investment advisors, tutors, travel agents, customer care agents and shopping advisors."
- Google (Now), Apple (Siri), Nuance (Dragon Mobile), and Microsoft (Cortana) are few of the companies that have already made big investments in virtual assistant platforms.
- IBM, hungry to halt double-digit server revenue declines, promised to invest over $1B in Watson in January, including $100M in startups working on software/services for Watson systems. But while the company is hoping Watson produces $10B/year in revenue in ten years, the platform had only produced $100M in revenue as of last October.
Apr. 10, 2014, 11:36 AM
- IBM (IBM +1.1%) is acquiring Silverpop, a developer of cloud-based marketing automation software to 8K+ clients, for an undisclosed sum.
- Big Blue praises Silverpop's ability to enable personalized interactions with potential clients, and to provide "sophisticated automation capabilities more commonly applied in lower volume B2B scenarios to complex B2C environments."
- Its software will be leveraged by IBM's 140 Ready for Smarter Commerce marketing partners, and integrated within a new IBM cloud marketing suite - details for the latter are due in May.
- Silverpop competes to varying degrees against Oracle-acquired Eloqua and Responsys, Salesforce-acquired ExactTarget, and Adobe's Marketing Cloud platform. It also competes against Marketo (MKTO -7.5%) and Constant Contact (CTCT -4.5%), which are selling off hard today amid a tech rout. Both companies have been lifted by M&A speculation in the past.
- The companies are all looking to profit from a shift in IT spend towards CMOs. IDC has observed IBM's efforts in this area could lead it to face off more against ad agencies such as WPP and Omnicom.
- Past marketing-focused IBM acquisitions: DemandTec, Xtify, Unica
Apr. 3, 2014, 4:43 PM
- Private Globalfoundries is "the lead candidate" to acquire IBM's (IBM -0.4%) struggling chip manufacturing/foundry ops, sources tell the WSJ. Market leader TSMC (TSM -0.5%) is said to have dropped out of talks, and though Intel is said to be involved, Globalfoundries is showing more interest.
- Sources add a deal isn't imminent, and that price remains an issue: IBM originally wanted $2B+ for the business, whose sales tumbled 33% Y/Y in Q4 (evidence of share loss) and is in the midst of seeing layoffs, but initial bids have only been north of $1B.
- The business was first reported to be on the block in early February. Bernstein has estimated it had 2013 revenue of $1.75B, and an op. loss of $130M.
- Though presenting integration challenges, acquiring IBM's chip unit would give Globalfoundries more scale as it battles against TSMC, which is estimated to have nearly 50% of the foundry market and claims a long list of blue-chip clients.
- TSMC shares slipped yesterday after Globalfoundries announced a wafer supply deal with ex-parent AMD that includes GPU and console processor manufacturing (thus far handled by TSMC). Nonetheless, Digitimes has reported TSMC's capacity is booked through the end of Q3 thanks to strong mobile/PC chip demand.
Feb. 24, 2014, 11:36 AM
- IBM (IBM +1%) is acquiring Cloudant, provider of a distributed cloud database platform for app developers. Terms are undisclosed.
- Cloudant's customer base includes Samsung, Microsoft, Adobe, and Fidelity. The company already relies on IBM-acquired SoftLayer's cloud infrastructure platform to deliver its services, which compete against Amazon Web Services' DynamoDB and solutions based on the open-source MongoDB.
- All three solutions rely on NoSQL, a database architecture that differs from the age-old SQL (used by IBM's DB2, as well as ORCL's bread-and-butter database) through its support for semi-structured and unstructured data.
- This feature, along with NoSQL's superior performance and scalability for certain apps, is leading the technology to be widely adopted for handling Web/cloud services and big data projects.
- Separately, IBM is promising to invest $1B to bolster SoftLayer's cloud software/app platform offerings. Last month, Big Blue, increasingly looking to cloud services to halt its ongoing revenue declines, said it would invest $1.2B to build 15 new data centers for SoftLayer.
- IBM/SoftLayer rival Rackspace (RAX +2.4%) owns a piece of Cloudant.
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