IBM Inks $1.25B Cloud Deal with Advertising Firm WPP

IBM Corp. (IBM) recently entered into a seven-year deal with the world’s largest advertising firm, WPP for a whopping $1.25 billion.

Per the deal, WPP will offer new digital services that will be run and managed within a global hybrid cloud infrastructure provided by IBM. We believe that this outsourcing deal will lead to a recurring revenue stream for IBM for the next several years.

We believe that though some softness in relation to big contract signings were visible in Europe, the situation seems to have changed for the better with growing willingness among European customers to embrace the global corporate shift to Internet-based computing.

Thus, a huge opportunity for cloud computing lies unexplored. We believe that IBM’s strategy of offering a hybrid cloud gives it an edge over its peers as it will enable clients to move existing systems to the cloud at their own pace.

Also, IBM’s services seem to be tailor-made for Europeans who demand that their data is stored in local data centers. IBM with its seven public cloud data centers across Europe -- in London, Amsterdam, Paris and Germany -- perfectly caters to the requirement.

However, we believe that IBM’s investments in new spheres including cloud computing, Big Data, mobile and security will boost software and services revenues in the long run.

IBM intends to focus more on analytics and cloud-computing to drive top-line growth and to combat a massive slowdown in hardware sales. In order to achieve this aim, the company recently inked deals with the likes of Deutsche Lufthansa AG and its Group companies, Thomson Reuters and ABN Amro Bank worth about $4 billion. All of the aforementioned deals were aimed at bolstering its cloud-based offerings.

Moreover, divestitures of loss making units mean that these will no longer continue to be a drag on the company’s profit and improve IBM’s margins in the long run.

However, intensifying competition from the likes of Oracle (ORCL), Hewlett-Packard (HPQ), SAP (SAP) and Microsoft remains a major headwind. Further, sluggish IT spending particularly for on-premise and data center hardware will continue to hurt IBM in the near term.

Currently, IBM has a Zacks Rank #4 (Sell).

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