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Checking in on the US Enterprise Software Industry

PART:
1 2 3 4 5 6 7 8 9 10
Part 10
Checking in on the US Enterprise Software Industry PART 10 OF 10

In Trying To Renew Itself, IBM Is Walking A Tightrope

Newer businesses grow 12%

IBM (IBM) is shifting its business model so that it can become a more modern IT (information technology) solutions vendor. It is redirecting its attention and resources to technology fields such as cloud or serverless computing, security, and enterprise mobility. These newer businesses are part of IBM’s Strategic Imperatives segment. IBM competes with the likes of Cisco Systems (CSCO), Amazon (AMZN), and Microsoft (MSFT) in these areas.

The Strategic Imperatives segment contributes ~43.0% of IBM’s sales on an annualized basis, and the segment’s businesses are growing at a decent pace. In 1Q17, IBM reported that Strategic Imperatives revenue had expanded 12.0% year-over-year.

In Trying To Renew Itself, IBM Is Walking A Tightrope

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Strategic Imperatives not yet liberating

With just $7.8 billion coming from Strategic Imperatives in 1Q17, IBM is left to rely on its mature operations. However, revenue from these mature businesses has been shrinking in recent years, implying that IBM is far from attaining the liberation it’s aiming for with its business model shift.

Difficulty to borrow on favorable terms

Experts at Moody’s Investors Service see risk in IBM’s business model transition. According to Moody’s, which recently cut its rating on IBM’s borrowing ability (XLK), Big Blue is at a complicated moment in its history. Because its Strategic Imperatives segment contributes only a small portion of sales, IBM has to rely on its aging operations to bolster it. The picture that emerges, according to Moody’s, is that IBM’s profitability and cash flow are pressured, which could complicate its ability to borrow on fair terms.

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