This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

IBM Delivers High-Margin Through Cloud

NEW YORK (TheStreet) -- IBM (IBM - Get Report) has been cutting a clear path toward a higher-margin business through its willingness to walk away from its lower-margin hardware businesses, and further its aggressive entry into the cloud.

"They're making a pretty big bet on the cloud and over time that should offset some of the headwinds, certainly the structural headwinds on the hardware side," says Peter Wahlstrom, an equity analyst for Morningstar Investment Services. "They know that ... 'we might be a little bit smaller, but we should be more profitable.'"

The company on Wednesday reported its cloud revenue was up more than 50% in the first quarter, booking its third straight quarter of cloud revenue of more than $1 billion. For cloud delivered as a service, the first-quarter annual run rate was $2.3 billion, doubling year to year.

IBM is now well on target to meet or exceed its objective of $7 billion in cloud revenue by the end of 2015. With its cloud business ending 2013 at $4.4 billion in sales, IBM will now only need to grow at a compound annual growth rate of 26% over the next two years to reach that $7 billion goal. In first quarter, its growth rate was twice that rate.

Must Read: Travelocity Owner Sabre Holdings Returns to Wall Street After IPO

While the company's cloud business has had an impact on IBM's x86 and Power hardware business, as cloud pursuits would do to every hardware provider, IBM's large software and services offerings in the cloud is enabling it to expand in areas where there is incremental, high-margin growth. Such areas include Software as a Service (SaaS), commerce, and workforce solutions.

Noteworthy is that a number of IBM's SaaS offerings, especially those added through acquisitions, are only sold as SaaS offerings, thus representing pure growth and not impacting existing, on-premise revenue streams. There are also offerings sold as both SaaS and on-premise solutions, such as Websphere, where the two delivery methods complement each other. Websphere grew 12% in the first quarter.

During the quarter, IBM announced investments of $1.2 billion to globally expand SofLayer cloud hubs, $1 billion to create cloud Platform for developers, and $1 billion to create the Watson business unit.

Holger Mueller, principal analyst and vice president at Constellation Research, said IBM's been coming out ahead of large public cloud competitors in the enterprise space following its acquisition of SoftLayer last summer. Since then, IBM has announced plans to double its software centers to 40 cloud datacenters in 13 countries. "Nobody has responded to that," Mueller underscores. Competitors including Amazon (AMZN) and Google (GOOG) each have about 20 datacenter locations to date.

A key attribute of IBM's SoftLayer is its bare metal server specialization; this is not found at Amazon, Google, or Microsoft (MSFT), which gives IBM an added advantage in the cloud for enterprise customers. "The bare metal capability of SoftLayer is more palatable to CIOs," Mueller explains. "A bare metal instance from IBM gives more visibility into its working than the virtualized competitors. Amazon and Google are very good at public cloud, but they are not as established like IBM in the enterprise, not a known entity in the enterprise, not who CIOs usually do business with."

-- Written by Andrea Tse in New York

Follow @atwtse >Contact by Email

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free
IBM $146.47 1.54%
AAPL $93.24 -1.01%
FB $117.26 -0.68%
GOOG $701.43 0.82%
TSLA $212.10 -4.70%


Chart of I:DJI
DOW 17,660.71 +9.45 0.05%
S&P 500 2,050.63 -0.49 -0.02%
NASDAQ 4,717.0940 -8.5450 -0.18%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs