Information Technology (IT) giant International Business Machines Corp. (IBM) recently inked a new five-year technology services deal with insurance and wealth management company, Hartford Financial Services Group Inc. (HIG).
Under the terms of the agreement, IBM will provide IT infrastructure support and services in order to streamline Hartford’s IT operations.
Hartford will shift its virtual desktop structure to IBM’s Smart Business Desktop Cloud Solution. IBM’s Smart Business Desktop Cloud service allows users to access applications, information and resources anytime and from anywhere.
IBM offers desktop virtualization solutions using cloud computing that consolidates client data into a central unit, thus enhancing security and flexibility. The service also reduces desktop software and hardware management and integration costs.
Smart Business Desktop Cloud offers savings of 15% to 40% of total end-user support costs (desk-side support, security, power and more) through virtual desktops hosted in the data center.
IBM will continue to manage Hartford’s data center operations and server networks. IBM will also install a zEnterprise System for managing workloads across mainframe and distributed technologies in a single platform, resulting in global accessibility of business applications.
Hartford, through the IBM partnership, aims to become a cost-efficient and customer-centric organization going forward.
IBM continues to focus on its cloud computing solutions, expanding its cloud offerings across sectors. We believe that the success of its product strategy is borne out by the many wins it has been seeing over the last few months.
IBM has identified cloud computing as one of the key growth drivers, which along with business analytics, emerging market sales and the Smarter Planet initiative are expected to contribute approximately $20.0 billion in revenue growth by 2015.
Most recently, IBM launched its new computing service “Smart Cloud”, which offers cost-effective data analysis, supply chain management and sales management capabilities to big companies that incur significant IT costs related to these operations.
The Smart Cloud is a step in the right direction and we expect it to drive IBM’s growth in the cloud computing market. IBM intends to generate revenues of $7.0 billion (more than 5.0% of its total revenue) from cloud computing by 2015.
Although IBM possesses massive data centers, analysts believe that the company will face tough competition from Amazon Inc.’s (AMZN) Web Services and Microsoft Corp.’s (MSFT) Windows Azure going forward.
Moreover, entry of large IT companies such as Hewlett Packard Co. (HPQ) into the cloud computing market will also be a headwind for IBM over the long term.
Further, consolidation in the cloud computing market could strengthen competitive offerings, thereby making life more difficult for IBM.
Recommendation
We remain optimistic on the company’s long-term growth following the bullish outlook provided by management. A sizeable service backlog, diversified product pipeline, and higher growth from outsourcing and business analytics will cumulatively boost top-line growth going forward.
Besides, IBM’s ability to generate strong free cash flow, expand margins and improve the already robust balance sheet make the stock attractive over the long term.
Conversely, currency fluctuations, decreasing contract signings and increasing competition remain the primary headwinds. We have a long-term Neutral recommendation on the stock.
Currently, IBM retains a Zacks #3 Rank, which implies a short-term Hold rating.
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