International Business Machines
) is set to announce its Q3 earnings on October 16. In Q2, IBM
reported a 3% y-o-y decline in revenues to $24.9 billion,
negatively impacted by cross currency headwinds. Its global
technology services (
) and global business services (GBS) divisions reported mid-single
digit declines in revenues. However, the software business saw
growth in Q2 and posted mid-single digit gains primarily on 9%
y-o-y growth in middleware revenues.
In its 2015 roadmap, the company stressed that it was focused on
emerging growth economies, big data analytics and cloud computing
services. While IBM reported a lackluster performance from growth
economies in Q2, its new initiatives in business analytics, smarter
planet and cloud delivered strong growth. We expect IBM will
continue to report revenue growth in these new business
initiatives. Moreover, we expect that software revenues will
continue to grow during the quarter on strong demand for key
branded middleware and adoption of IBM's software cloud services.
Additionally, we expect GTS and GBS to report growth in revenues
due to an improvement in order backlog.
See our full analysis on IBM
Middleware To Report Growth
The middleware division and the operating systems division are
the biggest contributors to IBM's stock value, together making up
nearly 55% of our estimate. During Q2, the software division
(middleware and operating systems combined) reported 4% y-o-y
growth in revenues to $6.4 billion. This growth primarily came on
9% y-o-y growth in key branded middleware revenues. The company
reported growth in all sub-brands of its software business. We
expect this trend to continue in Q3 as well. The Middleware and
Operating System divisions are important for our valuation of IBM
as they have the highest EBITDA margins of almost 47%. We expect
IBM will continue to report high margins for these divisions during
Backlog To Bolster Services Revenues
The Global Technology Services (
) and Global Business Services (GBS) divisions contribute over 35%
to IBM's stock value according to our estimates. While both these
divisions reported revenue declines in Q2, we expect their revenues
to grow this quarter mainly due to an improvement in order
IBM reported backlog growth for both its transactional and
outsourcing businesses in Q2. The total backlog grew by 3% to $141
billion which indicated that IBM's clients signed new contracts or
renewed old contracts with the company. We expect GTS and GBS to
report higher revenues from backlog in this earnings announcemnt.
Additionally, we expect the backlog to continue to improve in Q3,
which should add more stability and growth to its services revenues
in the coming quarters. Moreover, IBM's foray in high growth and
high value businesses such as business analytics, Smarter Planet
and cloud computing will help bolster GBS' revenues for the
Server Division Revenues To Remain Tepid
According to IDC, the worldwide server market revenues declined
by 6% in Q2 2013 due to lower demand. Additionally, IBM's market
share in servers declined from 29.1% in Q2CY12 to 27.9% in Q2CY13.
We expect the decline to continue in Q3 as well and IBM to report
lower revenues for the server division.
However, its high end System-Z server witnessed double digit
growth in revenues in Q2, and we expect this to continue in Q3.
System-Z demand is on the rise as IBM's clients continue to demand
mainframes with high processing power and big data analytics
capability. Therefore, we expect that the high demand for System-Z
will offset soft demand for its System-X and Power system servers.
We are closely watching IBM's revenue from System-Z servers as it
is an important driver for our revenue forecast of the server
We currently have a
$234 Trefis price estimate for IBM
which is about 25% higher than the current market price.
a Company's Products Impact its Stock Price at Trefis