Introduction

International Business Machine (IBM) was incorporated in New York in 1911 as ComputingTa ulating-!ecording Co (C-T-!)" was the amalgamation o# three companies namel$ Computing %cale Co&" Ta ulating Machine Co&" and the International Time !ecording Co& e#ore changing its name& IBM pro'ides IT solutions to clients through its usiness and technological ser'ices in more than 1() countries&

Business %egments
IBM operates in #i'e segments* +lo al Technolog$ %er'ices" +lo al Business %er'ices" %o#tware" %$stems and Technolog$" and +lo al ,inancing&

+lo al ser'ices include Global Technology Services and Global Business Services& Global Technology Services primaril$ pro'ides IT in#rastructure and usiness process ser'ices through Strategic Outsourcing Services: 35% of global services revenue Global Process Services: 5% of global services revenue Integrated Technology Services: 16% of global services revenue Technology Su ort Services: 1!% of global services revenue -$r !e'enue C.+!* /&/)0 1perating Margin* 12&30

Global Business Services +lo al usiness ser'ices o##ers Consulting (8% of global services revenue) and Application Management services ( !% of global services revenue) to clients which allows clients to le'erage their usiness at the #ore#ront o# industr$ trends o# ig data" social and mo ile" cloud" and anal$tics& In consulting" compan$ o##ers solution in strateg$" smarter anal$tics" application inno'ation ser'ices etc& In .pplication Management compan$ o##ers maintenance and support #or its packaged so#tware& -r !e'enue C.+!* )&20 1perating Margin* 1-0 Soft"are IBM primaril$ o##ers middleware and operating s$stems under so#tware segment& Two-thirds o# re'enue in this segment is annuit$ ased and rest is transactional in which a customer pa$s up#ront cost onl$& Its o##erings include "ebS here Soft#are $ integration and o ti%i&ation Tivoli Soft#are $Service %anage%ent soft#are 'otus Soft#are ( )ollaboration *ational Soft#are $ soft#are and syste% delivery O erating Syste%s

-$r !e'enue C.+!* 4&90 1perating Margin* 5(&20 Systems an# Technology This segment o##ers solutions to clients who re6uire ad'anced computing power and storage capa ilities& In s$stems" its o##erings include Po#er syste%s+ PureSyste%s+ ,ainfra%es+ Servers -$r !e'enue C.+!* -5&(0 1perating Margin* 2&(0 Global $inancing aids customers in purchasing IBM products and ser'ices alongside in'estment #inancing assets& IBM o##ers )lient -inancing )o%%ercial -inancing *e%anufacturing and *e%ar.eting -$r !e'enue C.+!* -4&/0 1perating Margin ,Y1/* 49&40

Customers %trateg$
IBM7s strateg$" similar to man$ in IT industr$" is #ocused on adapting to new trends o# cloud" social and mo ile" ig data etc& IBM7s strateg$ is #ocused on %marter 8lanet - ena ling intelligent world through smarter commerce" smarter cities and social usiness& +rowth Markets - .s de'eloped markets are reaching maturit$" emerging markets hold the growth Business .nal$tics and 1ptimi9ation - IBM7s o##ering #or Big :ata through smarter anal$tics" allowing usinesses to make smarter decisions Cloud Computing - IBM7s o##erings to cater to growing adoption o# cloud ased models and ser'ices

,inancial ;ighlights
!e'enue* <1)4&-1B !e' C.+! ,Y)(-1/* 1&150 1perating Income* <//&( n 1perating Margin* /10 Net income* <12&2B NI C.+! ,Y)9-1/* 9&-0 =8%* <14&2!1=* 3-0 in ,Y1/

Industr$ .nal$sis

1# the total glo al IT spending o# </ trillion" IT ser'ices accounts #or appro>imatel$ 4-0 o# the share& .ccording to +artner" IT ser'ices industr$ sums up to <9)- illion as o# /)1/" primaril$ comprising o# IT outsourcing" usiness process outsourcing" consulting" implementation" hardware support" and so#tware support ser'ices&

IT ser'ices are #urther di'ided in the wa$ the$ are deli'ered" i&e& 1##shore ser'ices or onshore ser'ices& In onshore ser'ices" #irms use resources or talents within their own countr$" whereas in o##shore ser'ices" the$ use ser'ices #rom a road& 1nshore ser'ices are market with high cost" there#ore" man$ #irms are tended towards o##shore outsourcing due to cost sa'ings& ,or e>ample" IT outsourcing operating costs are around <15)"))) per ,ull time e6ui'alent (,T=)" whereas the same costs appro>imatel$ </1"))) in India& Cost sa'ing as such makes o##shore outsourcing attracti'e" pushing onshore pro'iders to adopt this model in order to compete with alread$ esta lished pla$ers such as Tata" In#os$s etc&

?e$ 8la$ers
IBM is the leader in IT ser'ices in terms o# !e'enue as o# /)1/ with 2&90 market share& Mar%et Cap &evenue (TTM) '(S (TTM) +BM ,(Cisco )racle Accenture (.C </)/&5(B <4/&9-B <1/(&52B <149&(2B <-)&22B <1)/&53B <115&15B <43&21B <5(&13B <5)&12B <14&/ -<1&-3 <1&3( </&5 <4&9)perating ('G(*TM) Margin 19&-20 )&91 (&(/0 )&24 /5&/-0 1&)4 53&3/0 )&95 15&)10 1&5( Beta )&39 1&1/ 1&)2 1&15 1&13

Segment

(ro#ucts/Services

Competitors

+lo al Business %er'ices

Consulting" %$stem Integration and .ccenture .pplication Management %er'ices +lo al Technolog$ %er'ices %trategic 1utsourcing" B81" Cloud .ccenture" .ma9on %er'ices %o#tware @e %phere" Ti'oli" Aotus" !ational !ed ;at" 1racle %$stems B Technolog$ %$stem C" %$stem D" 8ower %$stems" ;8" :ell" Intel" .M: %torage %olutions" Microelectronics +lo al ,inancing Client ,inancing" Commercial ,inancing" ;8 !emanu#acturing B !emarketing

%creen clipping taken* 11E4E/)15 1*15 8M

%tock 8rice :ri'ers

IBM earns -(0 o# its total re'enues #rom %er'ices usiness which includes technolog$ and usiness ser'ices& The re'enue #rom these ser'ices depend on IBM7s a ilit$ to ha'e signings in each period& The more the num er o# signings" the more #uture re'enue to come& Companies who pro'ide ser'ices mostl$ ha'e contracts #or $ears" making the re'enue stream recurring& Book to ill ratio measures compan$7s a ilit$ to #ul#il those contracts in addition to new recei'ed& IBM7s ook to ill ratio since /)1) has #allen and is elow 1& This show that IBM7s ookings ha'e less as compared to its illings" re#lecting lukewarm demand&

.longside maFor markets" IBM has een #ocusing lot on growth markets #rom where it earns /40 o# its total geographic re'enues& !e'enue #rom maFor markets e>perienced 1&50 decline when adFusted #or currenc$ in /)1/ compared to (0 increase in growth markets&

IBM has een missing consensus re'enue estimates #or past 2-( 6uarters" along with $ear-o'er$ear decline in re'enues #or past 2 6uarters& ,urthermore" anal$sts e>pect a #ull $ear decline in /)15 and #lat re'enue growth in /)14&

!egardless o# re'enue misses" IBMGs =8% has een e'er increasing& Its target o# </) =8% $ /)1- with the growth e>perienced in past doesnGt seem unachie'a le&

Hpcoming Catal$sts
Impact o# Cloud computing* - IBM" although adapting to trends o# cloud" ig data" and mo ilit$" still #ace man$ risks in
its usinesses& @ith increase in shi#t to cloud" IBM7s s$stems and technolog$" the segment which o##ers main#rames" ser'ers" etc&" will e a##ected as cloud pre'ents the need #or high-priced hardware& In pu lic cloud ser'ices" which ha'e C.+! o# /5&-0 #rom /)1/-/)1(" #irms use pa$-as-per-use model which allows them to ha'e cost sa'ing $ reduction in hardware spending& .ccording to Credit %uisse estimates" o# 1(0 share o# %$stems and Technolog$ in IBM7s re'enue" 1-0 will e a##ected $ cloud& %imilarl$"

8aa% and Iaa% pose a threat to IBM7s middleware so#tware& In long run" %aa% might pose a threat as consumers will pre#er that o'er packaged so#tware& 1'erall" as per Credit %uisse estimates" cloud will ha'e net cloud impact o# 11&/0 on re'enues ut negati'e impact appro>imatel$ 1(0 on income&

IBM recentl$ announced 6uarterl$ di'idend o# <)&9- with <1- illion authori9ation #or u$ ack& IBM has target o# achie'ing </) =8% $ /)1-" which IBM will achie'e $ emplo$ing shareholderGs u$ ack and impro'ing its per#ormance& .ccording to I:C" Big :ata ha'e -$r C.+! o# 5/0 and IBM with its %marter .nal$tics can capitali9e on that as its Business .nal$tics ha'e grown 30 $ear-to-date& .dditionall$" according to Citi CI1 sur'e$ in 1I15" anal$tics will e a maFor growth dri'er #or ser'ice companies& 1n ig data and anal$tics #ront" IBM has also announced three new data disco'er$ and 'isuali9ation so#tware which will allow clients to ha'e insight#ul results& Its 8roFect Neo allows creating graphical inter#ace out o# unstructured data& IBM is the leader in content management so#tware with 1(0 market share" the market which has - $ear C.+! o# 3&50& IBM has ac6uired %o#tAa$er" a cloud computing in#rastructure compan$" which integrated with its %martCloud will allow to gain market share&

IBM has 1) $ear multi- illion dollar strategic partnership with HniCredit" trans#orming its IT in#rastructure

=arnings !e'iew
5I,Y15 !e'enues </5&( n +ross Margin 49&10 =8% (:iluted) <5&99 Change (YoY) -4&10 1)) ps 1)0 Consensus </4&( n <5&92 ut the growth was primaril$ due +ross Margins 590 5/&90 330 55&20 4(&/0 Change in +ross Margins 1() ps 1() ps ) ps -9) ps 14) ps

IBM7s earnings were a o'e consensus e>pectations o# <5&92" to ta> sa'ings instead o# per#ormance& 5I,Y15 Change (Yo$) (not adFusted #or currenc$) +lo al Technolog$ <9"494m -4&50 %er'ices +lo al Business <4"--3m )&40 %er'ices %o#tware <-"(93m )&20 %$stems and <5"/4(m -12&20 Technolog$ +lo al ,inancing <-)/m 2&-0

!e'enues #rom so#tware was dri'en $ middleware so#tware" which was up 50" ut was o##set $ 40 decline in operating s$stems& %$stems and technolog$ were maForl$ down owing to 530 decline in 8ower %$stems and 130 decline in %$stem >& The decline is primaril$ attri uted to slowdown in growth markets& 5I,Y15 Change (YoY) (Currenc$ adFusted) .mericas <1)&5 n )0 =M=. <(&5 n -/0 .8.C <-&- n -40 In .mericas" all regions showed impro'ement In =M=." @estern =urope showed impro'ement whereas =astern =urope" primaril$ !ussia" declined dou le-digits& In .8.C" Japan showed -0 growth ut o##set $ decline in other growth markets& The re'enue #rom growth markets declined -0" particularl$ ecause o# China where it declined $ //0 due to its economic re#orm plan impending&

%ell %ide =>pectations

.#ter its 5I,Y15" anal$sts ha'e downgraded IBMGs ratings& 1ut o# 51 anal$sts" 1( rate it as hold and 1/ rate it as a u$& /4 out o# 51 anal$sts ha'e 1/ month target price o# </))&

Cre#it Suisse Barclays

&ating Target (rice &evise# from '(S ( 01!') &evise# from Hnderper#orm <12) <1() <13&4<13&5( =6ual @eight <13) <13 <13&1

Barcla$s 'iew IBM as e6ual weight owing to its #a'ora le shi#t to anal$tics ut potential threats #rom %aa% and cloud and weakness in hardware and growth markets& Credit %uisse takes into account the deterioration o# ,C," lackluster hardware per#ormance and ine##ecti'e mi> in so#tware re'enue pose more than a temporar$ threat to IBM

!elati'e 8er#ormance

,or the most part o# this $ear" IBM has een underper#orming oth %B8 -)) and N.%:.I 1))& ,or past se'en 6uarters" IBM has een missing on consensus re'enue estimates and in past #ew 6uarters" its earnings has een maForl$ inorganic growth instead o# a etter per#ormance& IBM per#ormed etter in growth markets in /)1/" ut in last 6uarter it #ell $ 90 maForl$ ecause o# China& Its two o# maFor segments - +lo al %er'ices and ;ardware oth are e>periencing $ear-o'er-$ear #all since /)1/&

Compara le Kaluation %heet

IBMGs competitors are trading at an a'erage #orward 8E= o# 11&5>" whereas IBM is trading at 1)&2> L at a discount o# 20& Competitor7s .'erage ,orward 8E= 1$r DA?M ,orward 8E= 1$r %B8 -)) ,orward 8E= 1$r Nasda6 1)) ,orward 8E= 1$r ,orecasted =8% (,Y14) <13 11&5> </)5 14&4> 1-&1> 1(&/-> </-9 </(1 <51)

Comp %heet
Mar%et Cap IBM ;ewlett8ackard Cisco 1racle .ccentur e 195&-1B 43&24B 1/5&4)B 1-/&-2B 49&4-B '2/'B+T3A (ntm) 3&1(> 4&55> -&-> (&)3> 9&15> 3ivi#en# 4iel# /&)/0 /&110 /&(/0 1&)30 /&/50 &evenu e Gro"th (5yr) 1&150 /&9)0
4.22%

(/' 11&4/> 1-&/5> 1-&/5> 14&49> 12&//>

(/' (ntm) 1)&2> (&1/> 1)&95> 11&-> 12&51>

'(S Gro"t h (5yr) 14&9) 0 7.26%

1)&2)0 5&()0

12&4) 0 15&// 0

Kaluation Matri>
'(S (/' 88 108 1 8 1!8 178 6 < < < < < 1! 11/ 14) 123 192 //4 6 < < < < < 17 1/3 12) 19/ //4 /-2 6 < < < < < 18 144 13) /12 /-/ /33 6 < < < < < 0 12) /)) /4) /3) 5/) 6 < < < < < 1(2 //) /24 5)3 5-/

Bull Bear Case

Bull Case
Target 8rice*</-IBM trades at 1->(-$r ma>) with =8% <1(
+rowth markets" which earn /40 o# total geographic re'enue" will strengthen& IBM7s growth initiati'es continue to show growth such as Cloud which crossed <1 illion

in 5I,Y15& !ecent ac6uisition o# %o#tAa$er will #urther strengthen its cloud o##erings and show growth in ser'ices o##erings& IBM7s current acklog o# <141 illion continues to increase with glo al signings&

Bear Case
Target 8rice* <144 IBM trades at 9> (-$r minimum) with =8% <12 +rowth markets" once per#orming etter than maFor markets" ha'e een showing lacklustre per#ormance as the$ declined 3&30 in 5I,Y15& This might continue owing to IBM7s e>ecution ine##iciencies& !e'enues #rom China declined /)0 in 5I,Y15" and this might continue i# economic re#orms are not in #a'our& %$stems and Technolog$" which earns 1(0 o# total re'enues" #alls #urther due to decline in growth in China& IBM will e una le to ha'e organic sales growth considering it has een missing re'enue estimates and earnings ha'e een ased on sa'ings&

:i'idends
IBM has een pa$ing di'idends since /)))" and has 1/ month di'idend $ield o# /0& It recentl$ announced 6uarterl$ di'idend o# <)&9- with an additional u$ ack authori9ation o# <1- illion" making a total o# </)&2 illion u$ ack a#ter adding remainder #rom pre'ious authori9ation&

IBM has health$ cash #low metrics with strong 1C, and ,C,& Its di'idend co'erage ratio is strong with a ratio o# 4 times& %ince IBM has announced additional u$ ack plan o# <1- illion" its health$ ,C, will ensure its a ilit$ to pa$ that and meet its goal o# </) =8% $ /)1-&

008 )perating Cash $lo" $C$ 3ivi#en#s 3iv/Share 4/y Gro"th 3ivi#en# Coverage ($C$/3iv) 3iv 4iel#(5 yrs avg) 3ebt/':uity -&(> 13"31/ 14"241 /"-3<1&9

009 /)"((5 1("5/2 /"32) </&1150 4&->

010 19"-49 1-"524 5"1(( </&120 4&3>

011 19"342 1-"(53 5"4(5 </&9 120 4&->

01 19"-32 1-"-)4 5"((5 <5&5 140 4&1>

1&920 /&1&11&/4 1&-2 1&(-

!isks
+rowth markets" although an opportunit$" ut has a great risk due to recent slowdown that IBM is e>periencing& China has een maFor declining contri utor to growth markets"

and i# economic re#orms are not in #a'or o# #oreign pro'iders" IBM will e hurt adl$ in growth markets& Cloud computing is changing the wa$ industr$ operates $ precluding the need #or traditional so#tware and hardware& IBM stands at great risk as its hardware and so#tware segment might get hurt i# timel$ transition doesnGt occur& @ith 'irtuali9ation taking toll" IBMGs hardware usiness will su##er&