About the IBM Blockchain Technology Platform
When it comes to finding technology stocks that are suitable for a dividend growth investing strategy, you won’t find much selection. If you filter all stocks that belong to the “information technology” sector by “number of years dividend increased > 20,” you will have just a small handful of names. The first would be Automatic Data Processing (ADP), a company that’s increased their dividend for 43 years straight. Continuing down the list, you’d find a few smaller names that don’t pass our arbitrary $5 billion market cap cutoff. The only other name on the list is IBM, a stock that’s been debated for almost a decade as being “past its time” with a stale CEO who consistently makes the “worst CEO lists” published by all the major finance rags.
The facts speak for themselves, with IBM sales declining for over five years straight under Ginny Rometty’s well-paid guidance. Only last year did the ship turn around, but cynical investors want to see evidence of sustainable growth before feeling confident that the company has been successful in reshaping their technology product offerings. Here’s what the IBM “turnaround” looks like courtesy of YCharts:
One reason IBM has given for this turnaround is “blockchain”, but there’s no granularity in their financials that lets us know how much blockchain is contributing to the bottom line. All we get is the “strategic imperatives” mantra, under which blockchain would probably be classified as “cloud”. A look at the last 10-Q and 10-K provide no color into how much money is being invested in blockchain or how much revenue growth can be attributed to blockchain, so we need to get our hands dirty and scour the media for bits and pieces so we can put together a picture of what the IBM blockchain technology platform might look like today. (If you want to read a quick primer about how blockchain works, read this article first.)
IBM and TradeLens
If you’re not familiar with Maersk, they’re the world’s largest container shipping company with 639 ships sailing around the globe and a network of over 900 subsidiaries employing almost 80,000 people. A company like Maersk can help accelerate the adoption of a trade-focused blockchain solution, but not if Maersk is being seen as having special access to competitor data. That’s why Maersk has established an operational subsidiary called TradeLens which will be staffed by the Maersk employees who have been working on creating the blockchain ecosystem. IBM hosts, operates and supports the platform. IBM and Maersk jointly own the IP created from the collaboration and will independently market, sell and contract TradeLens through their own sales channels.
After a 12-month trial, IBM says they have demonstrated “how TradeLens can reduce the transit time of a shipment of packaging materials to a production line in the United States by 40 percent, avoiding thousands of dollars in cost.” That’s a big deal for the low margin shipping industry:
Whereas before it took 10 steps and five people to answer basic operational questions such as “where is my container”, TradeLens uses one step and one person. At least 94 organizations are using or planning to use the platform which is accessible via an “early adopters” program with commercial availability expected by year-end. So, what sort of revenues can be expected from TradeLens?
IBM Blockchain Revenues
Let’s say that all 900 subsidiaries of Maersk signed up to use the platform. It’s reasonable to think that Maersk could make all their subsidiaries eventually use the platform. If we look at the pricing structure for the IBM Blockchain platform, we see enterprise plans consist of a $12,000 per year membership fee:
900 subsidiaries each paying a membership fee of $12,000 a year is a run rate of about $10.8 million per year – a drop in the bucket. But we also need to consider “peer fees” which can be thought of as “user seats” where employees have access to the blockchain ledger. If we assume that 10% of Maersk’s employees (roughly 8,000 people) need peer seats at $12,000 a year, then our run rate jumps to $106.88 million a year – or $53.44 million every six months. For the first six months of 2018, IBM’s cloud revenues totaled $8.9 billion. Still, a drop in the bucket. Of course, we need to take into account how much IBM is spending on their blockchain initiative.
If we assume that IBM’s 1,600 employees dedicated to the blockchain platform are just making a six-figure salary, then IBM is spending about $80 million every six months to grow their blockchain platform. For comparison, IBM spent about $2.769 billion in the first half of 2018 on research and development. Looks like they’re not spending much and they’re not making much.
Blockchain doesn’t seem like it’s going to move the needle much unless IBM can get a lot of peers on their platform. At 100,000 peers, yearly blockchain revenues would be about $1.2 billion, again a paltry sum when you consider that 2017 revenues for IBM reached nearly $80 billion. At 1,000,000 peers, blockchain revenues would be about $12 billion which would start to have some impact at 15% of total 2017 revenues. So where can IBM find a million peers? Maybe in the banking industry.
IBM Blockchain Technology in Banking
Deutsche Bank, HSBC, KBC, Natixis, Rabobank, Société Générale, Santander and UniCredit are eight banks that came together to form a consortium called we.trade. Leading the charge is Roberto Mancone, formerly the Global Head Disruptive Technologies & Solutions at Deutsche Bank. These eight banks represent the founding members of the consortium which is said to be already onboarding new banks onto the platform which “uses smart contracts to launch and administer agreements between banks and clients.” That’s according to an article by Fora which claims that the platform is operational and currently being “used for trades among 11 European countries.”
The founding banks alone have 931,725 employees collectively. If we assume again that 10% of these employees would need the ability to transact on the ledger, then that’s 93,172 more peers on our way to a million. The top-5 U.S. banks employ somewhere around 800,000 employees according to Statistica. If a few large U.S. banks join the consortium, it’s reasonable to think that banks could contribute a meaningful number of “peer licenses” on IBM’s Blockchain platform. Then there’s the retail industry.
IBM Food Trust
In August of last year, IBM formed a consortium called “IBM Food Trust” which includes Dole, Driscoll’s, Golden State Foods, Kroger, McCormick and Company, McLane Company, Nestlé, Tyson Foods, Unilever and Walmart with over 2 million employees. While the solution is being offered at a lower price point (starts at $100 a month), the real value-add here is that these some companies have enough leverage that they can mandate use of the platform across the entire supply chain. In the past few days, we’ve learned that Walmart is starting to mandate that some of their suppliers use the IBM Food Trust platform. Walmart works with more than 100,000 suppliers across the globe, so there’s lots of growth potential there without IBM having to do much selling. (Once Walmart starts amassing all this big data, the supply chain efficiencies they’ll be able to realize should help their margins. It’s just another reason to like Walmart as a dividend growth investing stock.)
Other IBM Blockchain Initiatives
In addition to the initiatives we’ve discussed already, IBM is working on other verticals that could have legs. IBM Blockchain World Wire is a solution for cross-border payments “that clears and settles financial transactions in near real-time using blockchain technology.” Then there’s IBM Blockchain Trusted Identity which is a decentralized approach to identity management for individuals and organizations. When you consider that 97% of the world’s largest banks are IBM clients, and 90% of all credit card transactions are transacted on IBM mainframes, then it’s pretty easy to see how IBM might be able to deploy these solutions successfully in a short period of time. (We’ve talked before about how IBM mainframes have been engineered to ensure that blockchain transactions remain secure.)
The back-of-the-napkin analysis we’ve performed on revenues is too simplistic as it doesn’t consider profitability. We need a profitable business to fund all of IBM’s future dividend increases. For the first six months of 2018, cloud contributed 22.7% of pre-tax income at a margin of 7.5%. IBM claims that cloud margins have been compressed due to their ongoing technology investments in areas like blockchain. If that margin moves to 15%, then pre-tax income from cloud would move to around 45% of their total pre-tax income. Now that’s something that will impact the bottom line.
Harvard Business Review put out an article last year titled “The Truth About Blockchain” which talks about how it “will take decades for blockchain to seep into our economic and social infrastructure.” The article talks about how it “took more than 30 years for TCP/IP” to “reshape the economy” citing barriers for blockchain including security, technological, governance, and organizational barriers. It seems like IBM has succeeded in knocking down these barriers across multiple industries. The main reason seems to be IBM’s ability to create consortiums of companies that help drive the adoption of standards and create unique situations where entities can strongarm other entities to begin using the platform. While it may take a while for blockchain to contribute meaningfully to IBM’s bottom line, it seems that it eventually will if IBM can keep up this momentum.