IBM's Competitive Advantage on Display in $320 Million Deal

Don't underestimate the value of a deep base of longtime customers. International Business Machines (NYSE: IBM), while nowhere near as dominant a company as it has been at times in the past, remains a critical player in the global information technology industry. As the company invests in cloud computing, blockchain, and other fast-growing areas, the trust it's built with longtime customers, in some cases over decades, gives it an undeniable edge.

Expanding the relationship

That edge was on display on Thursday when IBM announced a $320 million infrastructure outsourcing deal with KMD, one of Denmark's leading suppliers of mission-critical software and IT services. IBM will provide KMD with IT infrastructure through 2024, and will assist KMD as it upgrades its infrastructure offerings for its clients. The scope of the agreement includes security, hybrid cloud, and machine learning, all growth areas for IBM.

This deal expands upon an existing outsourcing contract between the two companies, in which IBM provided mainframe services to KMD. IBM's relationship with KMD ultimately goes back more than 50 years.

KMD executive vice president of operations Lars-Henrik Jessen commented on the new deal:

Not the first big deal

The KMD deal is small potatoes compared to a $1.7 billion agreement with Lloyds Banking Group, announced about a year ago. Lloyds was also an existing IBM customer, and that deal also expanded an ongoing relationship. Under the 10-year agreement, IBM provides dedicated cloud offerings hosted in data centers operated by both Lloyds and IBM.

More recently, IBM disclosed that ExxonMobil, Bausch & Lomb, and Westpac Banking Corp. were all moving workloads to IBM's cloud. ExxonMobil is using IBM's cloud as the base for its Speedpass+ mobile app, which was developed by IBM Services. Bausch & Lomb (a division of Valeant Pharmaceuticals) will use IBM's cloud for its next-generation cataract surgical system, operating out of multiple IBM data centers. And Westpac, a large Australian bank, has moved workloads to dedicated IBM cloud infrastructure in that country.

IBM's cloud strategy is focused on serving large enterprises. Its existing relationships with the biggest companies in the world give it a leg up on the competition as those companies move to the cloud and adopt technologies like artificial intelligence and blockchain. IBM's presence is ubiquitous: 97% of the world's largest banks and 80% of global retailers rely on IBM products and services. That entrenchment positions IBM to win these types of contracts.

Contributing to the turnaround

With around $80 billion of revenue annually, and with a cloud business that's generated $17.7 billion of revenue over the past year, these deals don't move the needle individually. But each makes a contribution to IBM's transformation, and brings the company a step closer to producing consistent revenue growth once again.

IBM ended a nearly six-year period of declining revenue in the fourth quarter of last year, and it posted another revenue increase in the first quarter of this year. But first-quarter revenue was essentially flat, adjusted for currency, so the company is still not quite where it needs to be. Deals like the one with KMD are building a foundation for future growth, but IBM still has some work to do.

10 stocks we like better than IBMWhen investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has quadrupled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and IBM wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of June 4, 2018

Timothy Green owns shares of IBM. The Motley Fool owns shares of and recommends Valeant Pharmaceuticals. The Motley Fool has a disclosure policy.