Posts Tagged ‘IBM’

IBM Earnings Preview: What We Are Watching

October 17th, 2014

International Business Machines is set to announce its Q3 earnings Thursday, October 16th. In the second quarter of 2014, the company reported a marginal decline in revenues due to currency headwinds and divestment of the customer care outsourcing business. This decline was further accentuated by weak performance of the server and storage division, which is facing decreasing sales, product transitions, market disruptions, as well as the pending divestment of a major product line (x86 servers).Outsourcing31

During Q2, IBM’s total revenue declined by 2% year on year to $24.4 billion. However, the company reported 28% rise in net income to $4.1 billion, largely due to base effect of lower earnings a year ago arising from workforce rebalancing that impacted the bottom-line by $1 billion. While its core software business witnessed low-single-digit growth, due to 3% year-over-year growth in middleware revenues, its Global Technology Services revenues declined by 1%, primarily due to the negative impact of the sale of the customer care Business Process Outsourcing services business in Q4 2013. However, cloud computing and analytics initiatives buoyed Global Business Services division revenues, which grew by 2% year over year to $4.5 billion in Q2.

We expect that IBM will continue to report growth in revenues for both the software segment and the GBS division in Q3. Trends in IT spending indicate that it will continue to grow, albeit at a slower pace. According to Gartner, Worldwide IT spending is on pace to total $3.7 trillion in 2014, a 2.1 percent increase from last year. While most of the growth is expected to come from developed countries such as the U.S., we expect the company to report growth in revenues from emerging economies, which reported a lackluster performance in the previous quarters. Furthermore, we expect order backlog to improve, which will boost revenues in the future. However, we are closely watching the GTS revenues, which have declined due to contract restructuring and pricing pressure. We also expect its server and storage division to report another quarter of disappointing results as the company is refreshing its product offering, and demand for its product remains low.

Middleware and OS Revenues

The Middleware and the Operating Systems divisions are the biggest contributors to IBM’s stock value, together making up nearly 47% of our estimate. This division continues to report good growth on the back of strong brand recognition of its suite of software such as Tivoli, Rational and Websphere, etc. Additionally, demand for enterprise software remains healthy, which should boost demand for middleware software. Furthermore, these solutions cater to the growing markets that include mobile, social and security tools. Therefore, we expect software division to post growth in Q3 as well as in the near future. However, in this earnings announcement, we are closely monitoring the growth in new licenses for the different middleware products as it will help us to ascertain software demand in today’s market in greater detail.

Revenues From GTS To Remain Tepid

According to our estimates, the global technology service division makes up 21% of IBM’s stock value. Revenues from this division have declined over the past few quarter as a result of contract restructuring and a decline in outsourcing backlog. Furthermore, discretionary IT spending from clients remains weak, which is negatively impacting outsourcing revenues. We expect this trend to have continued in the third quarter, which likely produced a decline in revenues. However, contract restructuring will help the division to post higher profit margins in Q3

GBS Revenues To Post Another Quarter Of Growth

The global business services division contributes over 11% to IBM’s stock value according to our estimates. In Q2 2014, GBS reported a 2% year-over-year growth in revenue to $4.5 billion, buoyed by growth in Business Analytics (7% growth) and Cloud (50% growth). We expect this trend to power GBS revenues in Q3 and contribute more to the top line performance going ahead.

Server Revenues To Decline

Server and storage division, which was once the cash cow of the company, is witnessing a continuing decline in revenues. The company announced the sale of its x86 server business to Lenovo in Q1, in a transaction that is to close in increments over the remainder of the year. The x86 division caters to the blade and rack server market, which is facing intense competition from white box (i.e., unbranded) and better positioned server manufacturers. We expect to get a better understanding of the divestiture process on the earnings call. The remaining server businesses – z-Systems mainframes, the Power line, and its range of high performance computing platforms – each face specific issues. Mainframes are at the trailing end of product cycle and Power systems are confronting severe disruptions in the Unix server market, albeit with the new and open Power 8 architecture. High end platforms retain a strong market position and are benefiting as well from the new Watson initiatives. In short, this challenged division is experiencing a range of issues, though the trends may well be on the cusp of more meaningful improvement.

We currently have a $227 Trefis price estimate for IBM which is about 20% higher than the current market price.


IBM, SAP Team Up to Deliver Software as a Service Over Internet

October 15th, 2014

Companies in some countries are getting particular about where their data is stored, a trend that SAP SE SAP +0.53%  and International Business Machines Corp. IBM +0.15%  hope to turn to their advantage.Outsourcing20

The longtime partners on Tuesday said SAP will use IBM-operated facilities in addition to its own to deliver SAP software as a service over the Internet. IBM became a bigger player in such operations, known as cloud computing, when it acquired SoftLayer Corp. last year. It expects to deploy 40 data centers to supplement 20 facilities operated by SAP.

IBM’s data centers include sites in Germany, France, England and the Netherlands. Customers in such countries have become increasingly adamant that the cloud services they use store data in their own countries.

Such concerns as well as laws passed by some European governments have come to the fore since disclosures began in mid-2013 about data-collection practices by the U.S. National Security Agency and other intelligence services.

“We found that nearly every jurisdiction has some location or compliance requirements,” said Erich Clementi, an IBM senior vice president in charge of global technology services.

Kevin Ichpurani, an SAP senior vice president, said the IBM deal “allows us to address the data sovereignty issues.”

But moves to require local computing facilities conflict with the longtime concept of a borderless Internet, which stresses speed and efficiency rather than geographic preferences. Companies like Google Inc. GOOGL +0.72%  have argued against a trend they say creates unnecessary costs and complexity.

Eric Schmidt, Google’s executive chairman, warned recently of ”huge” costs of what he characterized as online Balkanization. “We’re going to end up breaking the Internet,” he said.

But corporate demands in the wake of the NSA revelations appear to be changing the business landscape. About 9% of U.S. companies selling cloud products to corporations now have clusters of computer servers in the European Union, compared with 2% before disclosures about the NSA surveillance programs, according to information compiled by Skyhigh Networks Inc., which advises companies on potential security threats of their tech services.

Robert Reid, CEO of Intacct Corp., recently estimated that 10% to 20% of potential European customers for cloud-based accounting software refuse to buy unless the vendor has a data center on the continent.

Such geographic concerns are yet another twist in a cloud craze that is forcing many companies to shift their strategies.

Others jumping on the bandwagon include old-line software vendors like Oracle Corp. ORCL +0.60%  and Microsoft Corp. MSFT +0.18%  , hardware makers such as Cisco Systems Inc., and younger companies, such as Google and Inc., AMZN +0.61%  which grew up in the Web era. In some cases, companies are rivals and partners at the same time.

SAP sells software that manages corporate operations like manufacturing, inventory and finance. Its programs often are used along with a database, typically supplied by IBM, Microsoft or Oracle.

But SAP, which competes most fiercely with Oracle in business application software, lately has emphasized an internally developed database called HANA. That software exploits memory chips to gain speed advantages over conventional databases that run on disk drives. HANA has become the core of SAP’s cloud offerings.

SAP had previously established a relationship with Amazon Web Services, whose cloud services have a broad following among startups and Web companies. But Mr. Clementi said SAP’s pact with IBM will have greater appeal to established companies that have shied away from outsourcing operations or want use a combination of their own data centers and those in the cloud.

One reason, he said, is that SoftLayer specialized in features that appeal to many mainstream businesses. One is offering customers dedicated servers rather than commingling application software and data from multiple companies on each server, an approach that backers say has performance and security advantages.

“What we are signaling with this agreement is that you can run full-fledged core enterprise applications in the cloud,” Mr. Clementi said.

Holger Mueller, an analyst at Constellation Research, said the deal is important not only to improve SAP’s geographic reach but also to help IBM boost utilization of its newly acquired data centers. It also is important for SAP, with is German heritage, to take a lead on addressing concerns about the location of customer data.

“It’s harder for SAP to say to customers, ’don’t worry about it,’” he said.

AmerisourceBergen Selects IBM to Manage IT Infrastructure

October 1st, 2014

IBM today announced that it has extended, by three years, its multiyear services agreement with AmerisourceBergen, one of the largest global pharmaceutical sourcing and distribution services companies in the world. IBM will manage the IT infrastructure that supports the company’s 13,000 employees and operations across 25 of its distribution centers in North America.Outsourcing44

Offering services ranging from drug distribution and niche premium logistics to reimbursement and pharmaceutical consulting services, AmerisourceBergen helps healthcare providers and pharmaceutical and biotech manufacturers improve patient access to their products. Its critical business applications and global processes – such as the timely movement of products across the supply chain – must run seamlessly and without interruption. The company turned to IBM because of its highest standards in availability, performance, reliability and security.

“Working with IBM provides us the capabilities we need to drive innovation in our business and to do so quickly and in the most cost effective way,” said Dale Danilewitz, Senior Vice President and Chief Information Officer, AmerisourceBergen. “This new agreement is an extension of our partnership with IBM, which will enable us to quickly deploy and capitalize on new technologies and IT services models.”

Among the benefits of the relationship, AmerisourceBergen will have the ability to access IBM’s industry-leading capabilities in areas such as cloud for new workloads and advanced analytics to address opportunities across its business.

“Looking forward, we plan to further expand our relationship by bringing together IBM’s deep expertise in the healthcare industry, our global reach and innovative technologies to provide AmerisourceBergen with additional skills and capabilities that enhance its ability to run and grow its business,” said Philip Guido, General Manager, Global Technology Services, IBM North America.

Gartner, Inc., a leading global IT research firm, has recognized IBM as a leader in the “Magic Quadrant for Data Center Outsourcing and Infrastructure Utility Services, North America” report(1). IBM was positioned the highest for ability to execute.

“We believe IBM’s ability to execute is based on our cloud leadership, as well as our focused strategy on mobile, social and security – which are further fueled by extensive R&D and technology investments in analytics and automation,” added Guido. “These are key differentiators that enable IBM to seamlessly integrate and orchestrate infrastructure services across hybrid IT environments spanning both traditional and cloud models.”

(1) Gartner, Magic Quadrant for Data Center Outsourcing and Infrastructure Utility Services, North America, William Maurer, David Edward Ackerman, Bryan Britz, July 31, 2014

Gartner does not endorse any vendor, product or service depicted in its research publications, and does not advise technology users to select only those vendors with the highest ratings or other designation. Gartner research publications consist of the opinions of Gartner’s research organization and should not be construed as statements of fact. Gartner disclaims all warranties, expressed or implied, with respect to this research, including any warranties of merchantability or fitness for a particular purpose.


India to become Capgemini’s default offshoring location soon

September 29th, 2014

Cap Gemini SA, the Paris-based consulting and software services firm, is trying to save costs by farming out more work to its centres in India and hiring freshers from colleges. Outsourcing30

Capgemini, which has software development centres in more than 10locations outside France, including smaller ones in Poland, Morocco and Vietnam, wants to make India the default offshore location, said Aruna Jayanthi, chief executive of Capgemini India Pvt. Ltd, in an interview last week.

Most of Capgemini’s key clients, who operate out of France, Germany, New Zealand and the Nordic regions, have begun offshoring more work to low-cost countries as technology budgets remain little changed and companies seek to cut costs, adding pressure on the French company to accelerate its plans to boost its operation in India.

Capgemini’s bigger rivals International Business Machines Corp. (IBM) and Accenture Plc. already have a massive presence in India. Capgemini has “a very low-margin business compared to its global peers like IBM and Accenture” which could be the reason for increasing its India offshoring, coupled with the fact that most of Capgemini’s clients are also going in for more offshoring today, said Sudin Apte, founder and research director with tech research firm, Offshore Insights.

In the last six-seven years, Capgemini’s offshore presence in India has grown from 10-12% to 45% today, and it has a very strong consulting practice, which is what will help it compete with peers such as Cognizant Technology Solutions Corp. and Infosys Ltd for the India business.

Capgemini, however, cannot be compared with IBM or Accenture, according to Apte. “Firstly, Accenture, which is considerably smaller than IBM, is still three times larger in terms of revenue compared to Capgemini. Secondly, both IBM and Accenture have 72-75% of their total resources in global delivery markets, while for Capgemini this number is about 54-55%.”

The 139,000 strong Capgemini had more than 50,000 employees in India. In comparison, IBM is estimated to employ about 150,000 people in India and Accenture, 100,000. Accenture entered India in 1987, IBM re-entered the country in 1992 while Capgemini started operations here in 2000.

By 2016, Capgemini, however, expects the number to account for half of its global workforce. Moreover, the company that has traditionally hired experienced professionals will also add freshers, said Jayanthi.

The company posted an 18% revenue growth in India on a total revenue of €5.1 billion in the June quarter, said Jayanthi.

About 85% of the work done out of India is divided between infrastructure management, application development and management, and consulting services while the remaining 15% comes from business process outsourcing (BPO).

“Our engineering services delivery that is being driven out of India will offer ‘digital engineering’ solutions to clients globally, with two-thirds of the business opportunity expected to come from the US in the next 12-18 months,” said Girish Wardadkar, global leader-engineering services, Capgemini.

Investing in the engineering space also allows Capgemini to offer a suite of services in addition to its traditional IT services, infrastructure managed services, BPO and consulting.

Capgemini, she added, with its six innovation labs in India will help drive 50% of the digital transformation required by clients out of India in areas like the Internet of Things, cloud, virtualization of the traditional application, development and management services.

Sanchit Vir Gogia, chief analyst and chief executive of Greyhound Research, acknowledged that Capgemini is building its capability in the engineering vertical but added that the company may face “tough competition from established Indian software services companies such as HCL Technologies Ltd, Infosys and Tech Mahindra Ltd, that already have a strong engineering practice”. “The company may also need to reduce its pricing by 25-30% to compete with Indian peers going forward,” said Gogia.


IBM to Retrain Outsourcing Employees in Bid to Boost Competitiveness

September 19th, 2014

Technology giant IBM has reportedly asked some of its employees in its technology outsourcing business in the United States to undergo training and accept a 10% salary cut for the next six months.Outsourcing3

According to reports, IBM chose to offer them training instead of laying them off for being less competitive. But these employees, according to the New York Times, say the step is a cost-cutting tactic disguised as a training program.

It is not clear as to precisely how many employees have been told to undergo training. According to the NYT article, “a few hundred employees in the United States have been affected.”

The move, the paper says, could become a trend in retraining programs as both corporations and workers struggle to stay competitive in a fast-changing economy.

The technology service market has undergone drastic change over the past few years, with an increasing number of corporate companies adopting cutting-edge technologies such as mobility and cloud.

Some employees are obliviously struggling to keep pace with the change by acquiring the new skills that clients are looking for.

Employees receiving the offer are given little choice other than to look elsewhere in the company “for opportunities for which your skills may be a better match,” the paper said.

With hundreds of data centers and offices, IBM is one of the largest technology services provider in the world, helping companies manage their IT operations and resources. Its global business services division, which accounts for more than 50% of the company’s consolidated revenue, employs over 190,000 people across more than 160 countries.

Revenues from the Global Technology Services segment in 2012 totaled US$40.2 billion, a decrease of 2% compared with 2011.


IBM cuts pay for workers it says can’t keep up: Report

September 18th, 2014

IBM is slashing the salaries of some of its employees for not keeping their skill set sharpened, according to a report from ComputerWorld.outsourcing60

Selected employees in IBM’s Global Technology Services strategic outsourcing group received a memo on Friday stating “that some managers and employees have not kept pace with acquiring the skills and expertise needed to address changing client needs, technology and market requirements.”

The memo states that workers will need to dedicate one day per week to training so that they can “focus on learning and development.”

But during their training, employees will also receive a 10 percent pay cut.

“While you spend part of your workweek on learning and development activities, you will receive 90% of your current base salary,” the memo states.
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One unnamed IBM employee who was selected for the program said this is IBM’s attempt to get specific employees to quit instead of having to pay them their severance, according to the ComputerWorld report.

CNBC reached out to IBM for comment, but did not immediately receive a response.


IBM cuts pay by 10% for workers picked for training

September 16th, 2014

IBM has initiated a new training program that will cut the pay of participating employees by 10%.outsourcing50

A copy of the Sept. 12 memo, seen by Computerworld, was sent to IBM employees in its Global Technology Services strategic outsourcing group. The memo sent to affected employees begins by telling the worker that an assessment has revealed “that some managers and employees have not kept pace with acquiring the skills and expertise needed to address changing client needs, technology and market requirements.”

It then tells the recipient that “you have been identified as one of these employees,” and says that from mid-October through the end of March, “you will dedicate up to one day per week,” or up to 23 working days total, “to focus on learning and development.”

But IBM is coupling this training with a six month salary reduction. The key statement in the memo is this: “While you spend part of your workweek on learning and development activities, you will receive 90% of your current base salary.”

Salary will be restored to the full rate effective April 1, 2015.

Asked about program, IBM spokeswoman Trink Guarino said the firm “is implementing a skills development program for a small number of U.S. strategic outsourcing employees. Under this program, these employees will spend one day a week developing skills in key growth areas such as cloud, analytics, mobile and social.”

There was negative reaction from some IBM employees.

One IBM IT professional, who asked not to be identified, said he was “shocked” to be added to the list, particularly since his work has been consistently praised by managers.

By reducing pay “by a significant amount,” IBM is acting “in the hopes that the employees won’t be able to sustain that pay and decide to quit, exempting IBM from letting them go and have to pay severance,” the employee said.

One source familiar with the program said the percentage of employees impacted is small, in the single digits.

While employees may see the pay cut as unfair, the salary reduction is viewed by management as a form of employee “co-investment” in training, and as a better alternative to laying off and hiring employees with the latest skills. It’s not that these employees lack skills, but they don’t necessarily have the ones that are needed today, the source said.

The Alliance@IBM has received complaints from its members, and shared some of the that reaction.

Wrote one employee: “I have spent the whole of 2014 improving my skills and my manager has reviewed and approved my ‘skills Update.’ I have received recognition this year for sharing my expertise and offered to be a mentor when asked. So just where are my skills lacking?”

Lee Conrad, national coordinator at the Alliance, a Communications Workers of America local, said that “IBM employees have no problem with learning new skills but to combine that with a salary cut is outrageous and unacceptable. IBM continues to drive morale and employee loyalty down with each new slap in the face like this,” said Conrad. “IBM needs to be mindful of further demoralizing workers and adversely affecting customers,” he said.


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