Editor’s note: IBM (NYSE: IBM) missed analysts’ expectations for earnings Thursday – a first since 2005. Matthew Casey is an analyst with Technology Business Research.
HAMPTON, N.H. - IBM Software’s lack of top-line growth in 1Q13 increases the stakes for 2013 execution on growth initiatives.
For IBM Software, 2012 was a year that was categorized by two major themes: core businesses and short-term profitability. IBM Software’s 1Q13 earnings results reflected this same trend, recording a 0.5% year-to-year revenue decline to $5.6 billion while expanding pre-tax margin more than one percentage point to 36.1%.
With yet another quarter of incremental revenue performance during 1Q13 (the third quarter out of the last four with no revenue growth or revenue decline on a year-to-year basis), the task for IBM Software through 2013 will be to shift gears to drive revenue and profit growth to deliver on 2015 financial goals. Leading growth during 1Q13 was IBM’s Social Workforce Solutions business (formerly Lotus) which grew 8% year-to-year.
Although growth initiatives including business analytics, cloud, Smarter Planet and growth markets will be key focal points to achieve growth, underlying trends like software-defined environments, open-source based platforms, and targeted strategies with line-of-business focused solutions will be essential to the success of these initiatives.
Of the four major growth initiatives, Business Analytics holds the greatest potential for both short-term revenue growth through 2013, and long-term growth beyond 2015. During the 2013 investor briefing in March, IBM increased its 2015 corporate business analytics revenue outlook from $16 billion to $20 billion annually.
The increased projection, and recent product releases within IBM’s Smarter Analytics Signature Solutions portfolio during 1Q13 highlight accelerated growth from the initiative, a business that TBR estimates to be just over $4 billion annually for IBM Software.
Targeting Specific Customer Pain-Points
One of IBM’s strengths continues to be its ability to tailor solutions to verticals and lines of business to address specific customer pain-points based on their industry or role. IBM demonstrated this strategy in 2012, launching solutions tailored toward CMOs and marketing departments. While the solutions are widely based on existing capabilities that provide the baseline functionality, including Cognos, i2 and Coremetrics differentiating these solutions by repackaging and addressing specific verticals and roles continues to allow IBM to drive growth within these portfolios.
Although IBM increased its overall guidance for business analytics, IBM Software’s Information Management revenue declined during 1Q13 by 2% from the year-ago quarter (to $1.7 billion).
Despite this decline in revenue from a year ago, TBR anticipates IBM Software’s analytics revenue to drive overall software growth through 2013, leveraging recent acquisitions such as Star Analytics (closed during 1Q13) and newly announced analytics solutions. In 1Q13, IBM announced a series of updates to its Signature Solutions portfolio, incorporating predictive analytics in the portfolio to drive decision making capabilities for customers in verticals such as telecommunications, industrial manufacturing and utilities, as well as enable decision making for finance departments within organizations.
Open-source Based Cloud Will Drive Growth
In addition to vertically aligning solutions to drive growth, increasing open-source capabilities will position IBM Software to drive overall revenue growth across its major strategic initiatives, particularly cloud. From a portfolio perspective, IBM Software’s strength in cloud is in providing the baseline tools, functionality and services to enable cloud development and delivery.
For IBM Software, basing its cloud business on open-source capabilities will increase the availability of cloud solutions across a broad ecosystem of end-users, developers and ISVs, by enabling the incorporation of proprietary solutions and third-party workloads.
The announcement in 1Q13 to base its cloud services on open-sourced based architectures, with software solutions such as IBM SmartCloud Orchestrator and IBM SmartCloud Monitoring Application Insight positions IBM to grow its overall cloud ecosystem and drive software revenue growth by not limiting development and integration with proprietary architectures.
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