International Business Machines Corp. IBM recently opened its first public cloud data center in the Nordics region. The new data center in Fetsund, Norway is the company’s 48th global data center and 12th in Europe.
The Fetsund-base data center offers the full range of IBM Cloud infrastructure services, including bare metal and virtual servers, storage, security services, and networking. Per the company “These services can be deployed on demand with full remote access and control, allowing customers to create their ideal public, private, or hybrid cloud environments.”
We believe the new data center will help IBM to rapidly penetrate the Nordics market. IBM’s cloud services are already being used by the likes of EVRY, Cxense, KONE, Opera and Sapa Group. We expect the new data center to aid the company in expanding its customer base within a short span of time.
Strategic Imperatives Key Catalyst
Data centers form the backbone of IBM’s Cloud Computing platform, which is an integral part of its “Strategic Imperatives”; the other two being Analytics and Engagement (Mobile, Security and Social). The company’s focus on offering cognitive solutions based on the cloud platform is expected to be its key driver in the long haul.
Over the last three years, the company has invested more than $16 billion on these “Strategic Imperatives” and earned revenues of roughly $29 billion from them in 2015. IBM stated that “Strategic Imperatives” represented 35% of the company’s revenues in 2015 and has higher gross margin than its legacy business.
In the second quarter of 2016, revenues from “Strategic Imperatives” increased 12% on a year-over-year basis to $8.3 billion. IBM’s cloud revenues surged 30% while Analytics revenues increased 5%. Revenues from mobile and security increased about 43% and 18%, respectively.
Moreover, Cognitive Solutions revenues grew 3.5% year over year to $4.7 billion. Cloud was up an impressive 54% in the reported quarter.
Cognitive Solutions to Drive Long-Term Growth
We believe that continuing investments in “Strategic Imperatives” and cognitive solutions will drive long-term growth. Per IBM, global IT spending on cognitive solutions is anticipated to increase at a much faster rate as compared traditional IT spending over the next decade.
Based on these, IBM now expects low single-digit revenue growth over the long term. Pre-tax income growth is expected to be in the mid single-digit, while earnings growth is estimated to be in the high single-digit range. Free Cash Flow realization is anticipated to be in the 90% range in the long run.
Moreover, IBM’s expanding cloud platform, cognitive solutions and industry focus (particularly those having significant growth opportunity like Healthcare) will boost its competitive prowess against the likes of Microsoft MSFT and Amazon AMZN.
Zacks Rank & Key Picks
IBM has a Zacks Rank #4 (Sell). NCR Corp NCR is a better-ranked stock in the sector sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
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