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IBM Keeps Buying in a Bid to Turnaround

Posted on Thursday, Feb 25th 2016

IBM’s (NYSE: IBM) top line continued to decline in the last quarter. This was the fifteenth consecutive quarter since revenues have fallen. In a bid to change this trend, Big Blue is investing heavily in acquisitions especially in the hot segment of cloud computing. But first the numbers.

IBM’s Financials
IBM’s fourth quarter revenues fell 9% over the year to $22.1 billion, in line with the market’s expectations for the quarter. EPS of $4.84 was ahead of the Street’s projections of $4.81 for the quarter.

By segment, revenues from Global Technology Services fell 7% over the year to $8.1 billion. Global Business Services revenues fell 10% to $4.3 billion. Software revenues were down 11% to $6.8 billion driven by the 10% decline in middleware products and 12% decline in operating systems revenues. Systems Hardware segment revenues declined 1% to $2.4 billion mainly driven by the 11% decline in System Storage revenues. Within the segment though, mainframe server products revenues grew 16% over the year and Power Systems grew 4% over the year. Global Financing revenues fell 15% to $0.5 billion.

IBM’s strategic initiatives revenues which include cloud, analytics, and engagement-based revenues saw a 10% growth in the quarter and 17% growth for the year. With $28.9 billion in revenues earned last year, the segment now accounts for 35% of the company’s annual revenues.

IBM ended the year 2015 with revenues from continuing operations falling 12% to $81.7 billion and strategic revenues increasing 17% to $28.9 billion. EPS for the year grew 13% over the year to $13.42.

For 2016, IBM projected an EPS of at least $13.50 which was far short of the market’s projected EPS of $15.00.

IBM’s Watson Focus
Last year IBM spent more than $3 billion on 14 acquisitions and by the look of recent events, the company continues to invest heavily in inorganic growth this year as well. Continuing with the focus on Health Care and Watson, IBM recently announced the $2.6 billion acquisition of Truven Health Analytics. Michigan-based Truven had a customer base of more than 8,500 hospitals, insurers, and government agencies that used its services to manage and analyze helath industry related data. Truven’s data included information from 215 million individuals. Its acquisition will help IBM add a trove of information to Watson Health, thus improving its interpretation, analysis, and forecasting abilities.

This is IBM’s biggest purchase in the past eight years and the fourth purchase within the health-related data space. IBM has been integrating data from its earlier acquisitions – Merge Healthcare, Explorys, and Phytel – to help improve Watson’s insights. Analysts believe that the US health system is moving to value-based care that allows patients to pay for healthcare based on outcomes. Watson’s improving insights will help providers reach this goal. The market was pleased with the announcement of the acquisition and the stock jumped 6%, the highest in the past four years.

IBM is also improving Watson’s functionality and recently announced the beta version of three APIs for the platform. Tone Analyzer, Emotion Analysis, and Visual Recognition will help improve Watson’s interactive capabilities with people. IBM also upgraded the earlier version of the Text to Speech API that now features emotional capabilities as well.

Within the IoT space, IBM announced the acquisition of The Weather Company’s B2B, mobile and cloud-based web properties including, Weather Underground, The Weather Company brand, and WSI for an undisclosed sum. The Weather Company’s mobile app is the fourth most-used mobile app daily in the United States and its cloud servers handle up to 26 billion inquiries every day. Post the acquisition, IBM will run the Weather Company’s data through IBM Cloud data centers globally and use it to serve as the technology backbone of IBM’s data services and Watson IoT businesses. It will now be able to collect larger volumes of data from billions of IoT sensors around the world while serving out real-time information globally.

IBM’s Cloud Growth

As part of its cloud focus, IBM entered into an agreement with VMWare recently. The agreement will help VSphere customers wanting to launch on workloads on IBM SoftLayer cloud infrastructure by simplifying the process. IBM’s biggest selling feature against the likes of Amazon is its ability to support Hybrid Cloud structure for these customers. IBM’s cloud offering allows customers to run some workloads in their in-house infrastructure and migrate part of it on the cloud. Amazon does not allow this capability, and it could prove to be an advantage for IBM.

Earlier this year, IBM announced the acquisition of live video streaming site UStream official for an estimated $130 million. UStream boasts of an 80 million monthly active user base and includes paying corporate customers such as NASA, Samsung, and Facebook. IBM is integrating UStream into its newly formed Cloud Video Services business. It will help developers build apps that are able to leverage video streaming capabilities. IBM estimates cloud-based video services to be a $105 billion by the year 2019. Its ultimate goal is to make the large stacks of corporate and other video data searchable and manageable just as other data.

IBM’s iX Growth

Recently, IBM also made three acquisitions in the digital design space. It acquired Germany’s Aperto to build out IBM iX, IBM’s design division that will offer organizations creative services such as strategy, analytics, and systems integration for commerce, mobile, and wearable platforms. Aperto has been in the space for the past twenty years and has customers like Airbus Group, Volkswagen, and Siemens in its portfolio. IBM will be able to leverage the acquisition to offer organizations specialized design expertise for mobile apps and other digital experiences. Terms of the deal were not disclosed.

Prior to the acquisition, IBM had bought Ohio-based digital marketing agency Resource/Ammirati, which has a clientele including names like Home Depot and Procter & Gamble. The acquisition will help IBM expand its ability to offer services such as advertising, including creative, media, and account management. Earlier in the year, IBM acquired, a Dusseldorf–based digital agency with customers including Axalta, Hammer and JAB Anstoetz for an undisclosed sum. All the acquisitions will be part of IBM’s iX space. Terms of the deals were not disclosed.

IBM’s stock is trading at $132.8 with a market capitalization of $128.8 billion. It touched a 52-week high of $176.30 in May last year. It has recovered from its 52-week low of $116.90 that it touched earlier this month. The company appears to be taking steps in the right direction but it will be a while before they display the desired results.

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