) 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
), HP (
), 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
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
- Software application development
- Software application testing
- Software upgrades, enhancements and maintenance
Key Drivers of Business Services Profitability
Global Business Services Revenues from Backlog
Global Business Services EBDTA Margin
Below we highlight each of these key drivers in greater
1. Global Business Services (GBS) Revenues from
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…
See our complete analysis of IBM stock here