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IBM’s Software Segment Performance in Fiscal 2Q15

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Aug. 17 2015, Updated 1:06 p.m. ET

Software segment continues to decline in fiscal 2Q15

In the prior part of the series, we saw how all the operating segments of IBM (IBM) suffered a decline in their growth in fiscal 2Q15. The software segment was no exception. IBM’s software segment, which combines middleware and operating systems, reported a 10.1% year-over-year (or YoY) decline in its revenues to $5.8 billion. In constant currency terms, this decline was 3%.

As the presentation above shows, IBM’s key branded middleware segment remained flat due to a decline in some of its flagship software offerings: Tivoli, Rational, and Workforce Solutions. Although Websphere, one of its flagship software offerings, reported a 5% YoY revenue growth in constant currency terms, Information Management remained flat. Like IBM, technology giants Microsoft (MSFT) and Oracle (ORCL) generate the majority of their revenues from the sale of perpetual middleware software licenses like Websphere.

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IBM’s Software-as-a-Service (or SaaS) offerings, security, commerce solutions, and Watson software gained traction in 2Q15, which helped to counterbalance the fall in key branded middleware. Its Operating System business failed to post growth as the company’s divested x86 business continued to impact its revenue growth. The x86 is one of the world’s dominant PC central processing units (or CPU). Hewlett-Packard (HPQ) led the x86 market with a revenue share of 29%.

SaaS consumption models are gaining traction

As we noted in our previous series on IBM’s earnings, IBM’s increased focus on the Software-as-a-Service model is the probable reason for the decline in the middleware segment. Currently, IBM is in the middle of its transition toward higher-margin and value services. The softness in its commoditized Enterprise Resource Planning (or ERP) implementations continues to counterbalance the growth in its strategic imperatives, including cloud, analytics, mobility, social, and security.

With a rapid growth in cloud adoption, clients are adopting SaaS at a much faster pace than IBM can shift its portfolio to make up for it. This change in the consumer preference has impacted IBM’s transaction revenue growth, as the majority of the company’s customers continue to deploy software through enterprise licensing agreements.

You can consider investing in the Technology SPDR ETF (XLK) to gain exposure to IBM. XLK invests about 3.51% of its holdings in IBM.

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