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RALEIGH, N.C. – Technology Business Research, Inc. (TBR) covers high-tech firms from a combined business, financial and technical perspective. Headquartered in Hampton, N.H, the firm is recognized as one of the leading high-tech market research and consulting organizations specializing in the analyses of computer, software, networking equipment, wireless, portal, and professional services companies as well as customer satisfaction studies.

Analysis on IBM Software’s 2Q10 financial results

Software is like exercise for IBM – more is almost always better – IBM’s corporate mission is not to maximize its revenue and scale. The company intentionally ceded the title of largest technology provider to HP in order to avoid margin erosion in the PC and printing businesses.

In the software business, IBM just completed a similar divestiture, completing the sale of its PLM sales and services business at the end of the first quarter. The loss of PLM revenue negatively impacted IBM’s Software revenue by 4 percentage points, as software revenue increased by 2% as reported and by 6% excluding the impact of PLM revenue.

Even though IBM Software’s 6% revenue growth excluding PLM led IBM’s reporting segments, profit was its greater value to parent company IBM Corp. during the quarter. Software operating income accounted for more than 40% of IBM’s total, although software revenue was just over 20% of total, as software operating margin expanded year-to-year for the 11th consecutive quarter.

IBM profit-based strategy is being driven two-fold by software: not only is software an increasing proportion of IBM’s total revenue, IBM is squeezing more profit from each software revenue dollar.

If it ain’t broke, IBM Software isn’t fixing it

After taking a brief respite from acquisitions during the first quarter, IBM turned its software acquisition machine back into the "on" position, announcing a slew of new purchases during the quarter, including Cast Iron, Sterling Commerce, Storwize, Coremetrics, and BigFix.

IBM Software’s expansion was driven by more than 60 acquisitions over the past seven years, which drove nearly a 50% increase in both software revenue and profit from 2003 to 2009. After IBM’s top line failed to meet expectations during 2Q10, TBR believes the company’s continued focus on software acquisitions will assist in managing its bottom line to maximize profit regardless of whether revenue is up or down in a certain quarter.

While IBM may not be able to meticulously control deal flow or customer spending in each and every quarter, generating more of it revenue via software and focusing on maximizing those software margins is a strategy that can drive consistent results from quarter to quarter with a steady upwards trajectory fueled by acquisition.

Acquisitions add to IBM’s agility in new markets

In addition to the financial impact, acquisitions play a critically important role in extending the relevance of IBM’s software business to new and emerging areas of technology.

Cloud is a significant initiative and area of investment for IBM, and TBR believes its purchase of Cast Iron will play an important role in IBM’s value proposition in the area of cloud computing. As a company focusing on end-to-end solutions, cloud presented an interesting challenge for IBM to provide those key integration links to deliver seamless solutions to customers.

Pure-play cloud vendors such as Google and Salesforce.com can extol the virtues of a totally cloud-enabled world, but IBM must deal in the messy reality in which cloud and on-site IT exist side-by-side.

The integration between existing onsite assets and cloud services is a sore pain point for many customers and with its purchase of Cast Iron IBM now has a powerful tool to ease those customers’ pain.

Cloud becomes another supporting role for IBM

In the cloud, just as in the traditional IT space, IBM will continue to focus on enabling and supporting customers IT environments. Though IBM is one of the largest IT vendors globally, most non-technical users have no direct interaction with any of its products.

Unlike HP or Microsoft, IBM has no consumer-focused offerings at all, and unlike Oracle and SAP, business users have no interaction with its business application offerings. IBM has built the world’s second-largest software business by focusing entirely on back-end functions such as system and data management, and will adoption that same role in cloud computing.

Cloud enablement becomes big business

The market opportunity from cloud computing extends far beyond the applications themselves. Companies such as Salesforce.com and Microsoft will build significant businesses around cloud offerings, but an entire ecosystem of adjacent businesses are blossoming around cloud services.

Though adoption is increasing, non-cloud adopters continue to outweigh cloud adopters (according to TBR’s Cloud Computing Adoption Study). For IT vendors, the business opportunity is not only selling cloud services to the majority of the market that has yet to adopt, but also providing the solutions that will entice those customers to adopt.

TBR believes cloud enablement is a significant opportunity for IT vendors – tackling the obstacles that are holding customers back from cloud services.

IBM will monetize the bottleneck to cloud adoption

IBM’s acquisition of Cast Iron directly targets the largest customer pain point associated with cloud computing.

Cloud security receives significant attention as an adoption barrier, but in TBR’s Cloud Adoption Study, integration was cited by 45% of non-cloud adopters as the leading barrier. Customers are not willing to offset the cost savings generated by cloud solutions with increased management costs and complexity. Regardless of how software is delivered – on-site, through the cloud, or via an appliance – integration and management are key decision points for any solution.

Whatever solution is chosen must integrate with existing assets and be centrally managed. The acquisition of Cast Iron provides IBM the tools to make this vision a reality for its customers, whether they utilize IBM, Amazon, Salesforce.com or other cloud services in heterogeneous environments.

TBR expects Cast Iron assets to be widely used through IBM, and believes they will be sold on a standalone basis, integrated with IBM cloud services, and used extensively by the Global Services team.

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