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International Business Machines Corporation

International Business Machines Corporation- Financial and Strategic Analysis Review

Reference Code: GDTC30172FSA

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International Business Machines Corporation - Financial and Strategic Analysis Review

Publication Date: 06-Apr-2015


Company Snapshot

Key Information

International Business Machines Corporation, KeyInformation

Web Address www.ibm.com

Financial year-end December

Number of Employees 379,592

NYSE IBM

Source : GlobalData

Key Ratios

International Business Machines Corporation, Key Ratios

P/E 10.29

EV/EBITDA 9.38

Return on Equity (%) 101.31

Debt/Equity 3.44

Operating profit margin (%) 21.54

Dividend Yield 0.03

Note: Above ratios are based on share price as of 02-Apr-2015

Source : GlobalData

Share DataInternational Business Machines Corporation, Share Data

Price (USD) as on 02-Apr-2015 160.45

EPS (USD) 15.60

Book value per share (USD) 11.98.00

Shares Outstanding (in million) 1,010

Source : GlobalData

Performance Chart

International B usiness Machines Corporation,Performance Chart (2010 - 2014)

Source : GlobalData

Company Overview

International Business Machines Corporation (IBM) is oneof the world’s largest providers of information technology(IT) products and services. The company manufacturesand sells computer hardware and software, and offersinfrastructure, hosting and consulting services. It providesIT infrastructure and business process services, consultingand systems integration, and application managementservices, and computing power and storage solutions. Italso offers lease and loan financing to end users. It servesa wide variety of industries including financial services,public, industrial, distribution, communications and generalbusiness.

SWOT Analysis

International Business Machines Corporation, SWOT Analysis

Strengths Weaknesses

Business TransformationStrategy

Effective Research &Development Activities

Global Service DeliveryModel

Rising Debt Burden

Limited Liquidity

Opportunities Threats

Growing Cloud ComputingMarkets

Strategic Acquisitions

Recent Agreement andContracts

Intense Competition

Expansion of ConsultancyBusiness

Rapid Technological Changes

Source : GlobalData

Financial Performance

The company reported revenues of (US Dollars)US$92,793 million for the fiscal year ended December 2014 (FY2014), a decrease of 5.7% over FY2013. InFY2014, the company’s operating margin was 21.5%,compared to an operating margin of 20.6% in FY2013.In FY2014, the company recorded a net margin of 13%,compared to a net margin of 16.8% in FY2013.

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International Business Machines Corporation - SWOT Analysis

SWOT Analysis - Overview

IBM manufactures and markets information technology products and services worldwide. IBM’s business transformationstrategy, global service delivery model and efective research and development activities place the company at anadvantage over its peers. The main drawback of the company is high debt burden and limited liquidity position. IBM’sbusiness could be restricted owing to factors such as intense competition and technological changes. However, the

strategic acquisitions, recent agreement and contracts, growing cloud computing markets and positive outlook for globaloutsourcing market could provide growth opportunities to the company.

International Business Machines Corporation - Strengths

Strength - Business Transformation Strategy

IBM developed operational efficiency and competitive market position by transforming its business strategy and operationsin accordance with the current economic conditions. Harnessing its business transformation strategy, the companyinvented breakthrough technologies and pursued transformational opportunities across the world. The companytransformed its business mix to accommodate higher value, profitable technologies and synergistic market opportunities.The company’s transformation strategy was based on four major areas: aggressive investment in growth markets,expansion in business analytics, development of core competencies in cloud computing and technologies, and investmentand business expansion in Smarter Planet concept. As part of its transformation strategy, IBM invested in more than 100countries beyond large cities and the BRIC (Brazil, Russia, India and China) countries by expanding its critical

infrastructure, developing strategic industries and by proactively responding to massive demographic shifts such as rapidurbanizations. The company's strategically invest across the growth countries including the Institute for ElectronicGovernment and the Energy and Utilities Solution Lab in China; Natural Resource Solution Centers in Perth and Rio deJaneiro; banking centers in Singapore and Sao Paulo; and a Latin American micro-financing center in Lima. IBM developeda wide portfolio of analytic solutions and software to cater different countries across the world. IBM conducts focusedoperations for enterprises cloud computing. IBM enhanced its business prospects for cloud computing by pursuing itstransformational strategy in the division. The company’s enterprise cloud computing operations helped it to expand andconsolidate its market position in cloud computing industry. The company, through its Smarter Planet, focuses onaccelerating the productivity and capabilities by offering bundled solutions to its clients, including business analytics,business process management, social business and cloud computing. The company’s transformational strategy enabledIBM to offer focused services to its clients under Smarter Planet.

Strength - Effective Research & Development Acti vities

IBM has a strong research and development (R&D) network, which differentiates it from its competitors. The company

spends about $6 billion per annum on its R&D activities. Its R&D activities focus on developing new products and servicesthat meet the needs of clients. It also develops new collaborative and co-creation relationships with developers, other companies, and institutions. The company develops business componentization and technology for business processes.The operations of the global services division are supported by global delivery centers, which enable the company to takeadvantage of local expertise and client relationships with responsiveness, competitiveness, and reliability. IBM operatesmore than 16 strategic delivery centers across China, Brazil, Central and Eastern Europe and India. IBM's 7,534 patentsawarded in FY2014 enables significant innovations that will position the company to compete and lead in the emergingopportunities represented by cloud, big data and analytics, security, social and mobile. In FY2014, the company incurredUS$5,437 million, which accounted for 5.8% of the company’s total revenue. Strong emphasis on R&D would allow thecompany to cater to the changing needs of its clients, giving it an edge over its competitors.

Strength - Global Service Delivery Model

The company expanded its business and market leadership through its global service delivery model. The companyidentified growth markets with growth rates of more than global averages. The company identified its growth markets

across countries in Southeast Asia, Eastern Europe, the Middle East and Latin America. IBM’s major markets includes theG7 countries of Canada, France, Germany, Italy, Japan, the US and the UK, besides Austria, the Bahamas, Belgium, theCaribbean, Cyprus, Denmark, Finland, Greece, Iceland, Ireland, Israel, Malta, the Netherlands, Norway, Portugal, Spain,Sweden and Switzerland. The company classifies its geographical operations into three, namely, Americas, Europe/ MiddleEast/Africa, and Asia Pacific. In FY2014, the company generated 44.9% of the total revenue from Americas, followed byEurope/Middle East/Africa region with 33.3% and Asia Pacific with 21.9%. IBM under its strategy has global integratedbusiness operations, which allows it to expand in new growth markets and improve productivity. The company hasoperations in more than 175 countries across the world. The company operates through the global integration of all major enterprise functions including from service delivery and marketing. A global integrated model allows IBM to focus itsresources on client-oriented work and enhance its rapid deployment capabilities to growth markets. By combining globalexpertise with local experience, IBM’s geographical structure facilitates management focus on local clients, speed in

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addressing new market opportunities and timely investments in emerging economies. The company spends significant partof its revenue annually in procuring materials and services global through its supply chain. In addition, the companymanaged approximately US$21.8 billion worth procurements for its clients through its Global Process Service organization.IBM was successful in deriving business value through its global integrated supply chain, which provides advantage increating value for clients.

International Business Machines Corporation - WeaknessesWeakness - Rising Debt Burden

Rising debt could have a major impact on the operational performance of the company as a major portion of the company'searnings would be diverted towards servicing of its debt obligations. This could concern the investors as well as make itdifficult for the company to raise funds at favorable terms from the market. IBM’s total debt component as of December 2014 was US$35,073 million, which increased by 6.7% over the previous year. The company’s debt has been growing at aCAGR of 12.56% for the period 2010 until 2014. As a result, the company’s debt to equity ratio increased to 3.43 times inFY2014 from 1.74 times in FY2013. If it fails to comply with any of the debt service requirements, the debt could becomedue and payable prior to its scheduled maturity. The company's failure to comply with any of these requirements couldbecome due and increased payable prior to its stated maturity. Such huge debt increases the debt servicing obligations of the company and impacts its cash flows adversely. It could limit IBM’s ability to raise debt in future and pursue other strategic opportunities. It would also increase the company’s vulnerability to adverse economic and industry conditions.

Weakness - Limited Liquid ity

Declining liquidity assumes significance as IBM will be compelled to spend a significant amount of money to enhance itsbusiness and revenue stream. The company reported a decline in all the liquidity ratios. This led to a marginal decline in itsliquidity indicators such as current ratio, quick ratio and cash ratio. In FY2014, it reported current ratio of 1.24 times asagainst 1.27 times in FY2013, followed by quick ratio of 1.19 times as against 1.22 times, and cash ratio of 0.21 times inFY2014 as against 0.27 times in FY2013. The declining current ratio indicates that the company is in a weak position tomeet its short-term obligations. The company also reported a decrease in cash and cash equivalents in the fiscal 2014. Thecompany had US$8,476 million in cash and cash equivalents as of December 2014, as compared to cash and cashequivalents of US$10,716 million in FY2013, reflecting a decrease of 20.9%. As a result, the company recorded negativenet change in cash of US$2,240 million during FY2014, as compared to a net change in cash of US$304 million in FY2013.The decreasing cash reserves indicate the company’s inability to obtain additional debt to finance acquisitions, capturebusiness opportunities and meet capital expenditure or other capital requirements in the future.

International Business Machines Corporation - Opportuni ties

Opportunit y - Growing Cloud Computing MarketsThe company could capitalize on the growing markets for cloud computing. According to industry analysts, the globalmarket for cloud computing is forecasted to reach over US$555 billion by 2020, growing at a CAGR of 17.6% from 2014until 2020. The growth is attributed to rapid adoption of infrastructure as a service (IaaS), software as a service (SaaS),platform as a service (PaaS), business process as a service (BPaaS), cloud advertisement services, and cloudmanagement & security services. In 2013, BPaaS and Cloud advertising services have the highest market share of 28%and 47% respectively within this segment. Since its inception, North America had the leading market for cloud computingand the trend is estimated to be persistent until 2020. The Asia Pacific is also evolving rapidly and is estimated to grow at aCAGR 23.5% from 2014 until 2020.

Opportunity - Strategic Acquisitions

Strategic acquisitions help the company in achieving its goal in a short period of time. The company’s strategy is to expandthrough organic and inorganic modes. In March 2015, IBM has acquired AlchemyAPI, a leading provider of scalablecognitive computing application program interface services and deep learning technology. This acquisition will accelerate

IBM’s development of next generation cognitive computing applications. The acquisition also significantly expands theWatson ecosystem, welcoming 40,000 developers that have innovated on the AlchemyAPI platform to the IBM Watsondeveloper community. In August 2014, the company acquired Lighthouse Security Group, LLC, a provider of cloud securityservices. This acquisition extended IBM's security leadership. In April 2014, the company entered into an agreement toacquire Silverpop, a privately held software company that specializes in cloud capabilities, the acquisition, if fruitful, wouldenhance the cloud capabilities of the company. In March 2014, the company acquired Cloudant, Inc., adatabase-as-a-service (DBaaS) provider. The acquisition would enable the company in strengthening its position in BigData and Analytics, Cloud Computing and Mobile.

Opportunit y - Recent Agreement and Contracts

The company expands its boundaries of operations and increases its customer base with alliances and agreements with

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industry players. Strategic relations help the company widen its business and allow it to gain an established customer base.In March 2015, IBM in partnership with Carnegie Mellon University has launched first cloud-based analytics partnership for smarter buildings. In the same period, Adobe and IBM announced partnership to build specialized enterprise consultingcapabilities for Adobe Marketing Cloud. In March 2015, IBM formed partnership with If Property & Casualty Insurance Ltd.to offer protection against cyber-threats for commercial customers. In the same period, United Arab Emirates Federal Authority for Government Human Resources teamed up with IBM to deliver more personalized mobile capabilities thatimprove employee engagement and streamline access to key resources. In February 2015, the company entered into anagreement with SPIE SA to launch a comprehensive solution for the supervision and management of electric vehiclecharging stations. In the same period, IBM entered into an agreement with Tech Mahindra to build a platform for thedevelopment of cloud-based apps for its clients on Bluemix Dedicated. In February 2015, HDFC Securities Limited enteredinto an agreement with IBM to launch a new mobile app that allows clients to securely trade stocks, track and manageportfolios and market movements, as well as analyze industry research and trends. In the same period, IBM Cloud’sSoftLayer infrastructure-as-a-service (IaaS) platform was selected by Sohonet for its network of film and media companies.In February 2015, IBM extended its large-scale services agreement with Shop Direct to accelerate digital transformation. Inthe same period, IBM formed alliance with SoftBank Telecom Corp to bring Watson to Japan. In February 2015, Bidco Africa Ltd. selected IBM to provide IT systems delivered as a service and managed remotely to help drive the client’sinvestment in its core business and expansion across Africa. In the same period, Turner Broadcasting System Latin America, Inc selected IBM and Kaltura to power a new authenticated on-demand service that will be offered throughTurner’s Multimedia Service Operator (MSO) partners in Latin America and Brazil. In February 2015, IBM entered intocollaboration agreement with Shiseido Co., Ltd. to empower its Beauty Consultants in Japan with mobile apps designed toprovide new customer services. In the same period, Citi teamed up with IBM to work with developers and build the next

generation of financial technology through the Citi Mobile Challenge. In February 2015, IBM formed long term partnershipwith CSC by extending IBM’s digital innovation platform, Bluemix, to CSC’s strong developer ecosystem to support globalcustomers accelerate their transition to the cloud and modernize their applications. In January 2015, Anthem, Inc selectedIBM to provide operational services for Anthem’s mainframe and data center server and storage infrastructure. In the sameperiod, the company entered into a patent cross-license agreement with Twitter, under the terms of agreement IBM willprovide 900 patents to Twitter.

International Business Machines Corporation - Threats

Threat - Intense Competition

The company operates in a very competitive IT environment. It faces significant competition from several large players inthe industry. Intense competition could affect the prices or demand for the company's products and services resulting inreduced profit margins and a loss of market opportunity. In Global Services field, it faces competition from Computer Sciences Corporation, Fujitsu, Hewlett-Packard Company, Accenture Plc, Infosys and Wipro. The company faces stiff

competition from HP, Dell, Sun Microsystems and EMC Corporation in the field of Systems and Technology. The companyalso faces competition from EMC and Dell in the field of servers and other storage products. The enterprise managementsoftware market in which IBM provides middleware, operating systems and related software is characterized by hugecompetition. The principal competitors in the field of software include Microsoft, Oracle, EMC and CA. In the field of GlobalFinancing, it competes with various companies such as HP, Dell, GE, and CIT Group, Inc. and other financial institutions. All these competitors range from some of the world's largest global enterprises to an increasing number of relatively small,rapidly growing and highly specialized organizations. The Services business is becoming increasingly competitive due to itsinherently higher margins.

Threat - Expansion of Consul tancy Business

Many of the technology consulting companies are expanding their business worldwide. Major consulting companies in Indiain particular are increasing their presence in the US. Companies such as Infosys, Wipro and TCS are benefiting from their unique cost proposition. Based on low cost operations in India, these companies have been making inroads into the marketshare of IBM in the consulting business. Such expansion could adversely affect the company’s business across the world.

Besides, the political debate on outsourcing from the US resulted in a number of US States seeking legislation to blockgovernment contracts to companies that shift jobs offshore. If outsourcing is limited due to any regulations, it mightadversely affect the company’s business.

Threat - Rapid Technological Changes

The company's offerings are characterized by rapid technological changes, which could affect its business operations. Tocompete effectively with its peers, the company should continually introduce new products that meet and exceed thecustomers’ requirements. The introduction of products using new technologies or the adoption of new industry standardscould make existing products, or products under development, obsolete or unmarketable. Inability to study the evolvingtechnological landscape could impact the company’s competitive position.

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NOTE:* Sector average represents top companies within the specified sector The above strategic analysis is based on in-house research and reflects the publishers opinion only

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