) competes with Oracle (
) and Red Hat in the middleware software market. IBM charges
for new software licenses, maintenance of existing licenses and
services associated with its popular middleware software. IBM is
also among the global leaders in business systems and competes with
hardware vendors like HP (
) and Dell (
) in the server market as well as storage firms like EMC (
) and NetApp (NTAP) in the storage market.
In its Q4 earnings press release, IBM reported strong
performance with revenues and margin improvements across several
segments. Revenue increased for all segments except global
financing, and gross margin improvement was reported in the
software and system & technology business segments.
We currently estimate that middleware software is the largest
value driver for IBM, contributing 46% of our
$185 price estimate
for IBM's stock. Comparatively, servers & storage makes up only
4% of company value. While our price estimate is nearly 20% ahead
of market price, there could be further upside to this number if
IBM can maintain higher margins going forward.
Growth in Software Business
IBM's software segment had a very strong quarter with revenue of
$7 billion, an increase of 7% over the same period last year. The
growth was particularly strong in key branded middleware, with
WebSphere up 32% year-over-year (YOY), Tivoli up 12% YOY, Rational
up 10% YOY, and Information Management up 10% YOY. Growth has
come alongside economic recovery and a broad PC refresh cycle.
Gross margin for the segment increased 0.9% for 2010 and
software profit increased $1 billion over last year.
If IBM can maintain improved middleware software gross margins
going forward, leading to higher EBITDA margins for the segment, we
estimate a potential 5% upside to our
$185 price estimate
for the company's stock.
Improved Server Margin
The systems and technology segment also had a tremendous quarter
with revenue increasing to $6.3 billion, up 21% YOY. Revenue growth
was driven by double-digit improvement in System z, System x, power
entry systems, disk storage, retail store solutions and
IBM gained 3 points of market share in total servers with System
z revenues increasing 69% year to year. Storage hardware revenue
grew 8% YOY while retail store solutions and microelectronics OEM
increased 26% and 30% YOY respectively.
Servers gross margin showed notable improvement, up roughly 0.8
percentage points for the year due to a better product mix as
shipment of high end servers picked up, particularly in Q4. If
sustained, this improvement could further lift our
$185 IBM price estimate
Drag the trend lines in the modifiable charts above to see
how various trends in middleware and server EBITDA margins could
affect IBM's stock value.
Register to win a free iPad. Visit our home page
complete analysis of IBM's stock is here