Will the “Third Platform” Provide IBM Much Needed Growth?
Ashit is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
During the Partner World Leadership Conference 2013, International Business Machines (NYSE: IBM) announced a new initiative to plug itself the “third platform.” The third platform comprises of big data analytics, cloud services, and mobile computing. The cloud computing and analytics segment of IBM performed exceptionally in the last few years, as the revenue growth reported was fairly consistent. Going forward, these divisions in combination with the third platform are expected to drive IBM’s growth. The IT spending on the global scale witnessed an exponential growth in the past decade. According to IDC, global IT spending will exceed $2 trillion by the end of 2013. This is a potential year on year growth of approximately 6%. The IT spending from the emerging markets is expected to reach $730 billion by the end of 2013, which is an approximate 9% year on year growth. The current trends and the constant growth in IT spending should bolster IBM’s earnings, and moving forward is expected to drive the entire industry.
Efforts to Bolster Profitability
IBM specifically stated in the 2015 road map that emerging economies and third platform services will play a crucial role in revenue growth moving forward. According to IDC, growth in emerging markets will account for 34% of the total global IT spending during 2013. Cloud computing also played an instrumental role in enhancing the IT solutions industry by offering SAAS (software as a service) and PAAS (platform as a service).
IBM has made special efforts to enhance its product portfolio offered on the third platform by launching the IBM Docs, Smart Cloud Storage, IBM Digital Analytics Technology (assesses data to identify patterns) and MobileFirst (combination of cloud computing and big data analytics). Such initiatives started to exhibit results during last year as, the revenue from the business analytics division reported a 13% growth, while the cloud division saw a staggering 80% growth. Smarter planet also reported a strong growth of 25%, helping the EPS for IBM report relative growth even though the total revenue for the company dropped from 2011. These are high margin divisions; hence the total earnings still reported growth from the previous year even though overall revenues declined. In addition, revenues from the emerging markets also reported a 7% growth.
Leveraging the New Initiatives
It is crucial for IBM to capitalize on the initiatives made in order to incrementally develop and increase revenues from other streams. With the introduction of the new SmartCloud storage, IBM can expect a robust growth in revenues from storage services as, the new service is radical and highly unconventional. Furthermore, Cloud storage is a highly cost friendly solution and an ideal choice for emerging economies. Going forward, emerging markets are expected to drive the storage services; hence IBM can leverage on the growing demand and stop the bleeding from this division. In addition, the Global Business Service division of IBM reported approximately $19 billion in revenues during 2012. This service is a heavy contributor to the overall revenues as it adds roughly 17% to the top line of IBM. GBS from IBM also reported a slight growth from 2011; however, the launch of big data analytics on cloud is expected to further bolster sales from this division.
The Technology services segment of IBM generates the highest revenues. Within this business segment it primarily competes with Accenture (NYSE: ACN) and Hewlett-Packard (NYSE: HPQ). Accenture is a massive player in technology and business outsourcing and generates roughly 43% of its revenues through it. The company also has a huge presence in technology and management consulting. It currently has a market cap of $53.5 billion and reported revenues of $27 billion in 2011. Similarly, HP generates its maximum revenues through technology services and infrastructure outsourcing. It has a market cap of $46 billion and reported revenues of $128 billion in 2011. Both companies directly compete with IBM in the technology services domain; nonetheless, IBM has led the two giants so far.
What can the Third Platform Offer Going Forward?
The launch of new initiatives can allow IBM to create more revenue streams. It can enable it to bolster the GBS division by fetching new buyers such as CMO and CFO, leading to a higher contribution in the top line of IBM. Furthermore, MobileFirst is expected to drive the Middleware Software division of IBM, which will eventually enable it to contribute significantly more to the overall revenues. I expect the new initiatives in mobile computing to facilitate IBM in strengthening its position as a global leader and report positive growth once again in 2013. The integration of various new services will enable IBM to bounce back and report a strong YOY growth in 2013.
Ashit Gulati has no position in any stocks mentioned. The Motley Fool recommends Accenture. The Motley Fool owns shares of International Business Machines.. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!