IBM - International Business Machines

[Phaceliacapital]

I think that in the past, their brand name had a strong moat, but I personally don't view brand names as that powerful...one or two major mistakes and your brand value can start eroding very quickly, furthermore, could an IT manager be fired for buying Accenture? I don't really think so.

 

Of course not, but it's not like you have 500 names such as IBM and Accenture, so I still think the name is worth something. Maybe not so much for services, but more for software/hardware?

 

I think IBM's core advantage is switching costs, their clients have multiyear contracts and it is very difficult for them to switch out of IBM infrastructure. I think Spark is correct in saying that their sales and distribution channel is also critical.

 

I agree here, and what about their balance sheet itself ? I mean if you buy IT architecture you typically don't take to risk to buy it from a start-up that can go bankrupt any minute, right? You'd prefer buying it from a company where you're more certain it will "stick around" for the years to come?

 

The issue for me is, what are they going to be selling? When it comes to applications, I think they have a good thing, and they can move these applications to a subscription based model in the future, which could make them even sticker. On the other hand, on the platforms side, they have a private cloud view, where companies build clouds of their own, but the largest area of growth has been in public cloud, even in the private cloud space, what is going to be their edge over AWS and Azure?

 

Softlayer?

 

 

International Business Machines Corp. IBM +0.48%  said it agreed to buy SoftLayer Technologies Inc., in a deal aimed at beefing up the technology giant's efforts in cloud computing and taking on Amazon.com Inc. AMZN -0.70%  more directly in that fast-growing arena.

 

IBM didn't disclose financial terms, but the deal for the privately held, Dallas-based company is worth around $2 billion, a person familiar with the matter said.

 

The transaction is a large bet in a string of deals by IBM aimed at adapting to a market where clients increasingly prefer to rent computer space rather than take on the burden and expense of buying their own servers, networking gear and other technology. The trend is a challenge to IBM's big technology-services business, which has made billions of dollars installing, maintaining and upgrading computer systems for clients.

 

SoftLayer is popular with technology startups and helps fill a gap in IBM's offerings: renting space to clients on computers the clients don't own, an area dominated by Amazon. A client, for example, might put its database or website on computer servers operated by SoftLayer rather than buy its own. The company, founded in 2005, has about 21,000 customers and operates 13 data centers in the U.S., Europe and Asia.

 

Before the deal, IBM had found more traction offering large companies and governments so-called private clouds, systems that the companies typically own and maintain. The acquisition could help IBM compete more aggressively for small and medium-size businesses, and offer a broader range of Amazon-like "public cloud" options to large enterprises.

 

IBM is reorganizing its cloud offerings around SoftLayer, which will anchor a new division within IBM's big outsourcing group. The division will start offering the combined services following the close of the deal, which IBM expects in the third quarter.

 

IBM is banking on cloud computing as a major growth area. In 2011, the company projected that cloud services would generate $7 billion in revenue by 2015, of which $3 billion would be new revenue.

 

SoftLayer will play a big role in helping IBM meet that goal, and the company will continue to look for other cloud deals, said Erich Clementi, senior vice president for IBM Global Technology Services.

 

"If something with a similar power comes along, we will look at it," he said.

 

Moody's Investors Service estimated last November that SoftLayer's revenue for the 12 months ended June 2012 was approximately $364 million. It estimated the company's operations burned cash after accounting for heavy 2012 capital expenditures, but projected free cash flow would be neutral in 2013.

 

Barclays BARC.LN +0.45%  estimated that SoftLayer is on pace to generate $400 million to $500 million in revenue this year.

 

SoftLayer Chief Executive Lance Crosby said his company has been attracting more large customers over the last year or two. The deal with IBM will make it easier for SoftLayer to expand around the world.

 

IBM said it offers more than 100 types of software delivered over the Internet that help companies to manage business functions such as marketing, procurement and online stores, among other things. It recently began offering its Jeopardy-playing artificial intelligence technology Watson as a cloud solution as well.

[Palantir]

Why do you feel Softlayer is going to solve their issues in cloud? I am not an IT guy either, but my take is that IBM is going to be facing a challenge in cloud platforms - what about the Softlayer acquisition gives them an edge over AWS and Azure in the private cloud space? I see this as a sign of them being more competitive, but I am not totally convinced...I think we will need to wait and see on this count.

[Phaceliacapital]

Unfortunately, I don't feel anything, I have no opinion on Softlayer's (dis)advantage when compared to AWS and Azure.. That's the part I am trying to figure out, I have been reading about IaaS, SaaS, PaaS, ApaaS etc etc but I more and more get the feeling that this will go in my "too hard pile".

[Phaceliacapital]

http://www.cio.com/article/742861/Why_IBM_Will_Win_the_War_With_Amazon_Web_Services?page=1&taxonomyId=3025

 

http://recode.net/2014/01/31/is-ibms-4-4-billion-cloud-bigger-than-amazons-not-quite/

 

But I mean, if you think about this as an owner what you ask yourself is:

 

1) How much can IBM lose in revenues if it is not able to compete successfully in the new cloud environment?

 

2) For those revenues that stay, how will it impact their margins?

 

 

The main benefit of the cloud is that I as a consumer can buy just the processing power I need (be it IaaS, SaaS, PaaS) and not a digit more. This implies that for those IBM customers that bought 200 computing power because they needed 180 (and could only buy in increments of 100), IBM will lose revenues. How much, no clue... In addition, if you've read Bezos biography, Amazon creates value for customers by offering the lowest price, this of course implies lower margins. As there are no victors in price wars this also means lower margins for IBM on part of their revenues (although I have no idea how to quantify that "part").

 

So, as a consequence, if IBM fully hops on the cloud train, and derives more and more revenues from the cloud, this will be lower and lower margin, at least until players such as Amazon are gone?.  Unless they are able to differentiate and obtain pricing power?

 

I don't know what kind of offering is necessary to beat the likes of AWS while maintaining high margins, then again, if I would I would probably work at IBM.

 

I feel like I am running in circles, but found this comment interesting nonetheless:

 

In a nutshell, 'cloud' is nothing but the most recent buzzword that has hit the technology industry. A few years ago, all you heard on rags like this was 'client-server' and how it would be the next slice of bread. That is just one example.

 

As someone with over fifty (50) years in IT, I've seen all these buzzwords come and go over the years. Here are a couple of facts to consider:

 

1) IBM is in ALL of the hardware businesses that ALL of the other hardware companies are in. And, in fact, the comment that IT sites are becoming so easy to use is most clearly illustrated by the truly innovative zEnterprise platform that IBM offers. That platform can combine virtually every mainstream hardware platform under a single image, managed [if you want to, but not required] from a single point of access. Yes, manage and operate a single image view of a traditional IBM mainframe, Windows, Unix, Linux, etc. all as if they were a single system.

 

2) IBM has been doing what is now referred to as 'cloud' as well as the older client-server concepts since the early 1970s. The interesting thing is that IBM has been able to implement those technology advances in such a way that the customer has not been required to throw away the old just to get to the new as is required with virtually every new major release of Windows. Not that it is common, but if someone wants to run an application built to run on the IBM mainframe platform of the 1970s, it can be run today on the latest and greatest of IBM mainframe systems without change. And, now, it can run along with any of the above platforms, integrated and managed from one point of contact.

 

3) As long as I mention 'virtual' that is another current buzzword that many people think is so new. IBM has been doing 'virtual' since the early 1960s. The name of the platform has changed, but it is not new.

 

4) ;Cloud' in its most simple description is running your application and your work on an image that you do not own. The 'image' is just out there somewhere 'in the cloud' where you don't see exactly where or how it is running. You provide your input, or your users do, and the answers auto-magically come back. Back in the 1960s and 1970s, IBM did that with the Service Bureau Corporation [sBC]. As the technology changed, it became easier for users to do that on their own mainframe with software technologies like CICS [probably the most widely used transaction 'server' in use today] and IMS [now along with DB2 - a.k.a., and SQL data base] as the data server. As hardware and software and networking evolved, the place where those components reside have been able to move to the most cost effective platform, often with only minor changes and disruption to the end user. So, IBM sold SBC and many people thought IBM was giving way a major revenue source. Most of you have probably never heard of SBC. I'll leave the new owner and their history for your own research Thus has client-server become the cloud. And at some point, what is called 'cloud' today will have some other buzzword attached to it. And, when it does, IBM will be there!

 

 

 

[pantheman]

Overview of the current IBM cloud platform

 

http://www.zdnet.com/ibm-as-a-service-cloud-pieces-fall-into-place-7000027039/

[obtuse_investor]

As a software engineer, perhaps I can help.

 

I'll go on a limb here and claim that companies cannot and will not move their valuable core data to a public cloud. The stuff the businesses have moved to public clouds has been unimportant/expendable stuff. And those who did move their data out of blind faith are quickly retrenching. Why? See the Snowden case and various high profile security issues.

 

This being said, IBM's focus on private clouds is exactly the right thing for them. Companies want to get the good stuff (scalability, quick turnaround, layer encapsulation, etc.) of the cloud but without the bad stuff (lack of high security). This is the niche that private clouds fill.

 

 

[Palantir]

^ I agree with not being able to move things to a public cloud. But it is not just about public cloud v private, even in the private cloud space IBM is not the only player. I think MS is probably the best positioned to play in the private and hybrid cloud space.

[obtuse_investor]

^ I agree with not being able to move things to a public cloud. But it is not just about public cloud v private, even in the private cloud space IBM is not the only player. I think MS is probably the best positioned to play in the private and hybrid cloud space.

 

Perhaps you are right about MSFT. I don't think that from a technology perspective. But, I haven't tinkered with Softlayer to have a perspective.

 

We have to realize that this is still the very early days of cloud. There are no clear winners or losers yet-- certainly not in the private space.

[nikhil25]

IBM’s Watson Tackles The Tumor Genome, On The Way To Personalized Cancer Treatments

To develop a specific treatment for each person's cancer, doctors would need to learn their tumor's genetic code. It's a task too difficult for humans to do for every cancer patient. But it might not be too difficult for a problem-solving supercomputer.

http://www.fastcoexist.com/3027868/ibms-watson-tackles-the-tumor-genome-on-the-way-to-personalized-cancer-treatments

[fareastwarriors]

Didn't realize Arlington Value Capital started a position in IBM...

 

http://www.dataroma.com/m/holdings.php?m=AV

 

[LowIQinvestor]

Most dangerous tech competitors in US:

IBM #1

http://www.bloomberg.com/visual-data/best-and-worst/most-dangerous-tech-competitors-in-u-dot-s-companies

 

Full disclosure: Raging Bull on IBM

[moody202]

^ I agree with not being able to move things to a public cloud. But it is not just about public cloud v private, even in the private cloud space IBM is not the only player. I think MS is probably the best positioned to play in the private and hybrid cloud space.

 

So far MS has been terrible in cloud space. All the way from software platform to Office & Email...has significantly lagged competition!

[fareastwarriors]

The company posted earnings of $2.54 a share, excluding one-time items, on revenue of $22.48 billion. Analysts had expected the company to report earnings excluding items of $2.54 a share on $22.91 billion in revenue, according to a consensus estimate from Thomson Reuters.

 

In addition, the company said it expects to post full-year earnings of at least $18 a share, ex-items, versus estimates for $17.84 a share.

 

[thefatbaboon]

Actually think this is the first report for a while where they haven't done too many shifty things.  A bit more aggressive than expected on the repurchase, and they snuck the years expected tax rate down from 23% to 20%.  But thats all pretty minor compared to the shenanigans they pulled last year.

[SwedishValue]

For a business with that high cash conversion, I think this is and has been cheap for quite a while. I have a hard time seeing how buying today would make one worse off compared with the Buffett purchase.

 

Also, I really like the repurchases.

 

I guess the reason I don't have any money in it is that there are plenty of cheaper opportunities out there.

[thefatbaboon]

 

 

Question-and-Answer Session IBM-Style!

 

Operator

 

Thank you. At this time, we would like to begin the question-and-answer session of the conference. (Operator Instructions) The first question comes from Toni Sacconaghi with Sanford Bernstein. You may ask your question.

 

Toni Sacconaghi - Sanford Bernstein

Yes, thank you Martin. I was hoping that you could confirm that you still expect to meet your free cash flow goal for this year of $16 billion? And secondly, in terms of goal setting, you now have a much lower tax rate for the full year than you anticipated three months ago? I think that’s going to add about $0.70 to EPS that was not anticipated three months ago. You also mentioned there maybe discrete items. So I would like to understand on that a) why the tax rate changed so significantly in three months and secondly, do you have anticipated discrete items over the course of the year and can you share those with us?

 

Martin Schroeter - Chief Financial Officer and Senior Vice President, Finance and Enterprise Transformation

Sure, Toni. I guess, first on free cash flow as we noted in the prepared remarks, our free cash flow was $600 million in the quarter and down about $1.1 billion year-to-year. Now, as we noted that’s it represents – the first quarter always represents a fairly small amount. Now, to answer your question, I am going to go through some math in a second, but to answer your question, we still do expect to grow free cash flow year-to-year even though we do have a tax headwind this year.

 

So, the short answer to your question is yes, we still expect to grow free cash flow. When we adjust – when we look at our free cash flow on a year-to-year basis and we start to put in a more normal like a model tax rate if you will. So we had as you can see in our data big tax headwind, but in total, we paid about $2.6 billion of cash taxes in the year. So that’s an 80% rate in the quarter. Obviously, that’s not a rate driven by – our model is not driven by the way the business runs, but it just reflects really the tax audit that we finished in the fourth quarter and the related payments around that. So we had a very high rate in the quarter. Last year, we had a rate of about 30%. And so that $1.4 billion year-to-year, which we identified as driving – would have driven $300 million year-to-year. The factors on kind of a rate adjusted or model basis, we would have grown faster again. So, I am very comfortable with the free cash flow generation in the business.

 

I think we are on track to deliver the full year and the cash flow growth. Again, we do have a headwind this year or the bulk of it was in the first quarter. On the tax rate, we were able to improve our expected full year operating rate to 20% with a more favorable mix of geographic income. And our income in intercompany dividend plans resulted in higher usage of foreign tax credits for the year. So, that’s our operating tax rate. The rate, however, as you noted and as we put in the prepared remarks excludes any potential discrete tax impacts, which may occur. And those are as you know generally for non-recurring items. So, two examples that could affect our rate from here: first, we did announce the sale of our x series business, now that hasn’t closed, but that could affect the rate. So the rate could be the higher from the sale of the Lenovo business. At the same time, I am sure you are aware that there are bills being discussed in Washington, tax extender bills which lower the rate further. So, our operating rate of 20% is ultimately going to reflect not only our mix of geographic income and the intercompany dividend plan, which rolls into that operating tax rate, but it’s ultimately going to reflect the discrete.

 

Patricia Murphy - Vice President, Investor Relations

Thanks, Toni. Can we go to the next question please?

 

Operator

 

The next question comes from Bill Shope with Goldman Sachs. You may ask your question.

 

Bill Shope - Goldman Sachs

Okay, great. Thanks. I just wanted to get a clarification on Toni’s question for the full year guidance. I mean, given the lower tax rate, as Toni mentioned, you are still offering the same EPS guidance. So, without the lower tax rate, it is a net guide down. So if so, could you comment on what exactly has changed above the tax line versus your prior expectations and the expectations you gave us in January?

 

Martin Schroeter - Chief Financial Officer and Senior Vice President, Finance and Enterprise Transformation

Sure, sure. So we got a lot done in the first quarter. I mentioned some of those in my prepared remarks, right. And roughly speaking if I were to net it down, we continue to move our investments and our resources to where we see the needs of our enterprise clients and we continue to – we divested a pretty substantial business in x series that didn’t fit our high-value model. So though we did get a lot done in the quarter, now we also as you would expect look at the trajectory we see coming out of the quarter in order to get the right guidance for the year. And I guess I’d go through it – I’ll go through it by segment, but first I think it’s important to note that we did not see much improvement in the trajectory in the GMU in the quarter. We were down 5% in the first quarter. We were down 6% in the fourth quarter. So, we are not seeing a trajectory improvement. GBS, as an example, just within the GMU went from high single-digit growth to low single-digit growth. So, we are not seeing the trajectory improve in the GMU as an example.

 

Now, looking at the segments at a higher level or the complete segment view, in services, when you adjust for the charge we took, because again, we will earn that charge back through the year. When you adjust for that charge, we did expand margin in the first quarter. And we would expect that to continue. So, in services, relative to last year when we grew profit in low single-digits, we are really only canning on kind of mid single-digit growth across those businesses. In software, we continue to see an improving growth rate in software and revenue, which obviously drives profitability. And then in hardware, hardware was down 23% constant currency. And we expect both the cyclical and the secular challenges that we see in that space to continue. So, as we said in the last call, our focus in hardware is really to stabilize that profit base on a year-to-year basis. So, we do see the ships we are making into the growth areas are absolutely the right things to do. We are being successful in growing that part of the business and our 1Q trajectory really reflects I think no real improvement in the GMU.

[moustachio]

That is pretty funny, thefatbaboon. A little snippet of a conference call like that really says a lot!

[fareastwarriors]

IBM End to Buyback Splurge Pressures CEO to Boost Revenue

 

 

http://www.bloomberg.com/news/2014-04-21/ibm-ceo-loses-tool-to-reach-profit-goals-as-buyback-splurge-ends.html

[fareastwarriors]

http://www.nytimes.com/aponline/2014/04/29/business/ap-us-ibm-dividend.html?src=busln

 

IBM Boosting Quarterly Dividend by 16 Percent

[fareastwarriors]

IBM Poised for Growth, Chief Says

 

 

http://www.nytimes.com/2014/05/12/technology/ibm-poised-for-growth-chief-says.html?ref=business

[CorpRaider]

http://www.businessweek.com/articles/2014-05-22/ibms-eps-target-unhelpful-amid-cloud-computing-challenges#r=most%20popular

 

IBM on cover of BW this week. 

[obtuse_investor]

http://www.businessweek.com/articles/2014-05-22/ibms-eps-target-unhelpful-amid-cloud-computing-challenges#r=most%20popular

 

IBM on cover of BW this week.

 

Thanks for posting. No doubt, WEB must be liking the negative press.

He marginally increased his stake in IBM in Q1.

[CorpRaider]

Kind of scary, but I remind myself of the "death of equities" issue.

[peter1234]

Rometty under raining rain cloud is hilarious ... They might need some good PR person ...

;)

[Palantir]

I feel this stock is going to struggle for a long time. Think of it as the apple of cloud computing- vertically integrated, won't compete on price in a commodity mark,but I don't understand what their edge remains.