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$IBM has made a significant step towards strengthening its cloud business by striking a 10-year, $1.65 billion deal with UK's Lloyds Banking Group ($LYG) for providing cloud services. IBM is to offer dedicated cloud services hosted in the data centers of Lloyds and IBM, and manage the migration of the application to the new cloud.
This is probably the kind of news investors would like to hear since IBM's Q1 results were below revenue expectations, which led to its stock tumbling. The delay in getting some major deals signed was considered to be the primary factor behind the discouraging numbers. This deal has therefore come at just the right time, especially since it has come following reports that IBM has lost a major cloud customer, WhatsApp. Owner Facebook is reported to be moving WhatsApp from the IBM cloud to itsown data centers. With WhatsApp using 7,000 bare- metal high-performance servers by IBM, Facebook was enabling IBM to earn up to $2 million each month for its services.
But WhatsApp is nothing when compared to Lloyds Banking Group that has $1 trillion in assets, making this deal a pivotal one for IBM. Lloyds is a major financial enterprise with annual revenue in the range of $50 billion and market cap worth $64 billion. And, being an IBM customer already, Lloyds has a strong relationship with the hardware and cloud computing company.That's the heart of IBM's strategy. Large organizations form the customer base of the company. When the time comes for these organizations to shift to cloud, IBM becomes the obvious choice for managing the transition.
While shifting to cloud is a mammoth undertaking, it's more so for an organization in the highly regulated banking industry. The company admits that it is shifting from a systems integrating organization to a services integrating company, as the deal with Lloyds indicates. The increasing importance of, and need for, cloud integration felt by various organizations is causing IBM to strike lesser hardware deals and accept more cloud service agreements. Investors need not be worried about the lower number of hardware deals being made by IBM since cloud integration services are becoming a major stream of revenue for the company, and the large organizations that face the need for cloud integration form the large chunk of IBM's customers. So let's say the company is set for more earnings and growth, resulting in better stock performance. All it takes are lucrative deal announcements such as this one.
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