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IBM Inks 7-Year Outsourcing Deal with Lufthansa for $1.25B

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IBM Corp. (IBM) recently inked a seven-year deal with Deutsche Lufthansa AG and its Group companies for a whopping $1.25 billion. However, the deal awaits the approval of antitrust authorities and Lufthansa’s supervisory board to become effective.

Per the deal, IBM will take over Lufthansa’s information technology infrastructure division and all personnel (1,400 approx) associated with it from Apr 1, 2015 onward. During the tenure of the deal, IBM will bring new solutions that incorporate business analytics with mobile computing and social business to enable Lufthansa to attract more customers by offering them new and innovative services.

Moreover, through this deal, IBM will work toward making the airline’s IT process more efficient adopting cloud-computing technologies. This, in turn, is expected to generate an annualized cost-savings amounting to 70 million euros for the Lufthansa Group.

We believe that this outsourcing deal will provide recurring revenue stream for IBM for the next several years.

Disappointed with the dismal third quarter earnings, IBM’s management abandoned its 2015 roadmap earnings target of $20.00 per share. However, we believe that IBM’s investments in cloud computing, Big Data, mobile and security will boost software and services revenues in the long run.

IBM intends to focus more on newer spheres like analytics and cloud-computing for driving top line growth to combat a massive slowdown in hardware sales. In order to achieve this aim, the company recently partnered Twitter (TWTR), by which it will integrate Twitter’s data into its own products for predicting market trends for its clients. Also, the company entered into an alliance with Apple (AAPL) by which it will be developing enterprise-based apps for the latter’s devices.

Moreover, the divestitures of loss making units ensure that these will no longer continue to be a drag on the company’s profit. We believe that though the loss of revenues due to these divestitures will initially hurt the top line, they will eventually 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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