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How Did IBM’s Software Division Perform in FY14?

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Mar. 31 2015, Updated 12:06 p.m. ET

Software business also reported a decline

IBM’s (IBM) software business encompasses a middleware and operating systems division. In 4Q14 and fiscal year 2014, the software segment revenue stood at $7.6 billion and $25.4 billion, a decline of 7% and ~2% on a year-over-year basis, respectively. Owing to decline in IBM’s flagship software offerings (WebSphere, Tivoli, Rational, Information Management, and Workforce Solutions) the company’s middleware segment suffered a decline of 6.4% on a year-over-year basis in 4Q14.

To gain diversified exposure to IBM, you can invest in the iShares US Technology ETF (IYW) and the Technology SPDR ETF (XLK). IYW and XLK invest about 4.2% and 3.51% of their holdings in IBM, respectively.

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Emergence of cloud is casting shadows on IBM’s perpetual licensing business

IBM, like its peers Microsoft (MSFT) and Oracle (ORCL), generates the majority of its revenues from the sale of perpetual middleware software licenses like Websphere. However, with the cloud catching on fast in the IT environment, it has impacted the licensing business of IBM.

Falling demand for hardware and the associated enterprise software coupled with the price sensitivity of clients to keep their costs under control are the chief factors that have contributed to the success of cloud. Thus, the growing popularity and acceptance of cloud has forced IBM to change its business model and extend its services to the cloud domain to bolster its revenues.

In 2014, IBM’s operating system registered a 13.4% decline in its revenues on a year-over-year basis, owing to the Power and Z systems being in the later phase of the product cycle and their corresponding sales failing to deliver growth. Customers chose to delay their purchase, which has negatively impacted operating system revenues.

Increased focus on cloud for revenue growth

IBM’s increased focus on the Software as a Service (or SaaS) model is the probable reason for the decline in the middleware segment. This decline also implies changes in the consumer’s preference, which has impacted transaction revenue growth as the majority of the company’s customers continue to deploy software through enterprise licensing agreements.

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