IBM's Under-The-Radar Initiatives
- By Shudeep Chandrasekhar
In many ways, IBM's (IBM) transition into a growth-oriented one seems to be a never-ending process. There are several thrust areas that the company is focusing on now, but revenues continue to decline along with stock price.
In a recent article titled Watson Analytics - The Real Heart of IBM? , I covered in detail why I thought IBM's analytics could be the company's real game changer. With quarterly revenues from IBM's analytics unit near $5 billion, this segment alone accounts for nearly a quarter of their overall revenues and looks good to go well over that.
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The intrinsic value of IBM
Though analytics is the real money winner for IBM among its growth drivers, their cloud division is the one that gets a lot of media attention. Thanks to the roaring growth of cloud adoption around the world Amazon (AMZN), Microsoft (MSFT) and IBM have been growing their respective cloud revenues at double-digit paces over the last two years. That trend is expected to continue for the next four years, by all estimates.
Despite appearing to be a huge container ship lost at sea, IBM has stayed on course with its nimbler and more agile competitors in the cloud industry and has kept its growth pace in step with them, posting 50% revenue growth during the second quarter.
But the success of their biggest hitters are also dependent on other growth drivers that form CEO Virginia Rometty's "strategic imperatives." These are segments that can be compared to Google's (GOOGL) Other Bets, but differ greatly in that they are built on top of IBM's existing capabilities. As such they are not bets, but rather calculated investments in forward-looking technologies.
IBM Mobile
One such segment is their mobile unit, which is a dark horse running under the radar, even though quarterly revenues have already touched the $1 billion mark. To put things in perspective, this is $100 million more than Google made from its entire cloud business as of the fourth quarter 2015. IBM's mobile segment grew 93% and 43% during the first two quarters of the year compared to the year-ago periods.
"In 2013, IBM launched IBM MobileFirst, a mobile strategy that enables clients to streamline and accelerate mobile adoption. IBM MobileFirst combines IBM's industry expertise with mobile, big data and analytics, cloud and social technologies to help organizations capture new markets and reach more people.IBM has more than 4,300 patents in mobile, social and security, which have been incorporated into IBM MobileFirst solutions. IBM MobileFirst has a set of mobile solutions in different industries such as Banking, Insurance, Retail, Transport, Telecom, Government, Healthcare and Automotive."
- Wikipedia
At 43% year-over-year growth, this is one of the fastest growing segments within IBM's strategic initiatives and I am going to be keeping an eye on developments on the mobile front.
IBM Security
Security is another area which IBM is pushing hard in. This is an extremely mature market and growth is expected to be slow. However, it is an evergreen industry with increasing needs as networks become more decentralized and disintermediated. Much of that comes from the increase in mobility and cloud. These present challenges to nearly every business, but IBM has successfully turned it into a huge opportunity for them.
The biggest hurdle for cloud in the early days of its existence was security. Since the purpose of cloud was global access from any device connected to the internet, insulated networks suddenly became wide open, increasing security risks in the process. One mistake by a cloud provider could cost them dearly. For IBM, that translates into a revenue opportunity, selling security products and solutions to thousands of enterprise and smaller clients around the world.
So far, IBM security is yet to breach the billion-dollar mark because much of the revenue from security solutions is bundled along with cloud and analytics services, but I am confident that this will be a long-term earner for IBM. It is not going to grow as fast as cloud, analytics or mobile, but it will be a very stable business unit for the company.
How does this tie in with everything else?
Cloud is the thread that runs through every facet of today's IBM. By playing to its strengths in hybrid cloud and analytics, the company is able to deliver its services at the click of the mouse. A client who signs up to use IBM's infrastructure service SoftLayer, for example, can easily be persuaded to take Watson for a trial run to gain insights into his business, which opens up possibilities for mobile applications using MobileFirst. Security will obviously be an essential part of that package.
By interlinking its services and making it convenient for customers to keep adding on new packages, IBM not only wins on the revenue front, but becomes a one-stop tech solutions provider for the entire company. That is the moat every technology company wants to have at the end of the day.
I still hold that analytics is the key to IBM's future growth, but the company has created a very effective ecosystem that allows clients to focus on what they need rather than on what IBM wants them to have.
The major criticism I continue to have about IBM is that their messaging to clients is still not strong enough. If they can consistently convey the message that IBM is a company that focuses on the business needs of the client rather than its own sales agenda, I think they can do even better.
Disclosure: I have no positions in any of the stocks mentioned above and no intention to initiate a position in the next 72 hours.
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The intrinsic value of IBM
