IBMs investorbrifing 2015, 5 viktige tema

m-line growth for the next few years. In short, we believe the company is well-entrenched but needs to move quickly just to keep pace in areas such as cloud, analytics, and value-added services.

First, given that this year's event will be at IBM's Silicon Alley headquarters, we f ully expect management to provide an update on its Watson Business Unit (which received a $1 billion investment last year). The cognitive computing landscape is rapidly evolving and customer expectations are changing as well. IBM is entrenched as a legacy analytics player, with revenue of $17 billion in 2014. Still, many investors are focusing on fast-growing, next-generation visualization companies such as Tableau, Splunk, and Qlik, and as such IBM's management will want to show that it is not only relevant in this portion of the market, but also that it's maintaining share in analytics (ideally both through growth across existing and greenfield customers alike).

Second, on the heels of opening 15 new data centers over the past year to the tune of $1.2 billion, cloud should be another area of focus at the investor briefing. We've embraced the view that the industry is moving toward a hybrid cloud model, but there are still questions surrounding the economics of each cloud delivery option. While we don't expect a one-size-fits-all response from management here, this is clearly a strategic area of focus for IBM, and an update on the recently introduced BlueMix (PaaS) and further traction of SoftLayer would be welcomed. Over the past year management, similar to the Watson Group, has created a dedicat ed business unit for cloud and other integrated units to address growth areas such as security and Smarter Commerce. We'd like to see tangible evidence of IBM's ability to accelerate the speed it is bringing solutions to the market.

Third, IBM's Services units have underperformed as of late, and we believe that next week's investor briefing is an opportune time for management to share its turnaround strategy for this segment, in particular. From a DCF perspective, the objective model may be indifferent between a company that delivers faster growth at lower margins and one that grows the top line more slowly (or shrinks) but captures higher-value and more profitable contracts (resulting in the same overall cash flow). Subjectively, however, we don't believe that investors are satisfied with a flat (albeit large, at $128 billion) backlog, even if services margins continue to trend toward record levels on internal efficiency gains. Instead, as future deals shrink in size and duration, owing to a steady shift toward cloud engagements, IBM (despite its number one market position) risks coming across as either not being relevant or as too restrictive or prescriptive in its offerings (whether valid). In short, IBM is a leading player in both the outsourcing and consulting marketplace, but we don't view the firm as currently reaching its full potential here.

Fourth, one way that IBM has started to show that it is willing (and able) to play well with others is th rough its recent partnership announcements. During 2014 IBM signed landmark deals with Apple and Twitter, while expanding relationships with other firms such as SAP. We think that IBM has long been viewed as a company focused on and incentivized to push its own proprietary products and services. This has the potential to turn off prospects (especially smaller businesses and tech-savvy startups) seeking both a low-cost open source solution and avoidance of vendor lock-in. Perception is unlikely to reflect reality, but high-profile partnerships are one way that IBM can at least change some of the stigma surrounding its cultural model; we'd be encouraged by additional announcements here.

Fifth, there is little doubt that IBM benefits from a large and entrenched customer base, and that the (slight) majority of revenue is either considered recurring or annuitylike. The challenge is that many of these underlying businesses are either mature or in decline. At roughly 75% of consolidated revenue in 2014, legacy businesses are a heavy weight for IBM to lug along, even if the incremental margins are large. We have seen IBM cut ties with some businesses it has deemed noncore over the past year, and while we don't see many more areas to cut, we'd like to hear more about ways to either reinvigorate growth or transition existing customers into one (or more) of the "strategic" growth buckets. Frankly, we worry that the longer some of IBM's legacy customers stay on contract, the more complacent IBM becomes, or that IBM may route R&D dollars or incremental capital spending toward projects that service the existing market. We think that a simple capital allocation vision and insight into where the firm's nearly $10 billion annual spend is headed over the next few years would be helpful to investors.

Putting the above topics together, we expect management to provide a strategic road map and help investors put in perspective both the challenges and opportunities that the firm faces. Management has already indicated that a mass restructuring is unlikely, and there is clear acknowledgment that 2015 is going to be another transition year. In short, an investor's near-term expectations should be set pretty low. Looking beyond this year, we would like to see incremental support that the consolidated top line can increase at a low-single-digit rate, margins that are still headed higher amid the underlying mix shift toward software, and that pretax income can grow at a high-single-digit rate in a normalized year. We don't anticipate that management will outline a major five-year turnaround strategy similar to the one HP revealed a few years ago, as we don't view IBM as being in such a precarious position. That said, IBM is at a critical juncture and the strategic bets that the company is placing today (and has placed in recent years) are bound to have a lasting and formative impact on the IBM of the future.