Why IBM’s Software segment still means hope for the future



IBM’s Software segment

IBM’s Software segment consists mainly of middleware and operating system software. “Middleware” refers to the software products used to develop and deploy software applications. Database systems, transaction monitors, and messaging software all fall under “middleware.”

The chart above shows you year-over-year revenue and margin growth for the Software segment.

Key categories under Software

This segment includes:

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  • WebSphere: Enables organizations to run high-performance business applications
  • Information Management: Aids in integration, management, and analysis of enormous amounts of data from varied sources—enabling clients to gain competitive advantage and improve their business outcomes
  • Watson Solutions: A cognitive computing platform that can interact in natural language and process “Big Data” with unmatchable speed and accuracy
  • Tivoli: Security systems software that offers clients a single security intelligence platform to secure all aspects of their enterprise and thus prevent security breaches
  • Rational software: Supports software development for IT and embedded system solutions
  • Mobile software: Provides clients end-to-end mobile solutions across platforms and application development
  • Social Workforce: Helps businesses connect with people and processes through collaboration, messaging, and social networking software

All these software solutions cater to the fast-growing market of mobile, social, and security tools. This market promises robust growth for the software segment. This segment offers differentiated products and services, but it faces stiff competition too.

Software—the highest-margin segment

In fiscal 2013, software contributed ~26% and ~38% to total revenues and operating profits, respectively. This segment—especially middleware—provides the highest margins among all segments. So IBM Corp. (IBM) has strategically shifted its focus from hardware to software and services.

Software’s contribution to total revenues has steadily risen year after year. According to an IBM press release, by 2015, through its continued focus and investment in high-value and rapid-growth areas like Business Analytics, cloud computing, and smarter planet, IBM plans to generate ~50% of its profits from its software segment.

Microsoft (MSFT) leads the worldwide software market in terms of revenues. According to Gartner, apart from IBM, Oracle (ORCL), SAP AG (SAP), and Symantec (SYMC) were the other top-five software vendors in 2013.

Recurring revenues help future visibility

Approximately 67% of software revenues are annuity-based. They’re generated through recurring license charges, support, and ongoing subscriptions. The remaining 33% comes from one-time arrangements. Clients pay one-time up-front charges for a perpetual license.

Recurring maintenance and service revenue contracts have high renewal rates. This gives the company a distinct advantage and revenue visibility.


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