 | |
- close
- close
|
Suggest other news sources for this topic
WIKI ANALYSIS
International Business Machines (NYSE: IBM) is a leading global technology firm that offers a variety of products and services in the information technology industry. Their current businesses consist of 5 major divisions: Global Technology Services segment; a Global Business Services segment; a Software segment; a Systems and Technology segment; and a Global Financing segment. In 2006 IBM lost its position as the number one IT company to Hewlett-Packard in terms of annual revenue (difference of $235 million between revenues of HPQ and IBM). In 2008 that lead widened as HP generated $118.3 billion in revenue while IBM's revenue came in at $103.6 billion.[1][2]
Although IBM lost its first place rank to Hewlett-Packard in terms of revenue, IBM is a far more profitable business (boasting a gross profit of $45.6 billion for FY08) than Hewlett-Packard (gross profit of $28.4 for FY08).[1][2] There are several underlying factors that contribute to IBM's high profitability which has increased every year since 2005. One of the reasons for the increase has been upper management's active effort towards divesting from cyclical and commoditizing businesses, while concentrating on the higher value services and software sectors.[1]
IBM reported a net income of $3.1 billion on $23.3 billion of revenue for 2009 Quarter 2.[3] Net income for 2008 Quarter 2 was $2.8 billion - IBM increased its net income year over year by 12%.[3]
Business Overview
IBM was founded in 1911 when the company produced commercial scales and tabulators. Today, the company produces software, servers and other storage devices, and provides IT services. IBM employs over 350,000 people in 170 countries across the globe, and about 60% of total revenue comes from outside of the U.S. IBM serves clients in a variety of industries, with the largest revenue generating industries being financial markets and small- and medium-sized businesses.
Business Segments
- Systems and Technology: IBM's Systems and Technology business segment produces servers, data storage products, microelectronics, retail store solutions, and printing systems through a partnership with Ricoh and infoPrint Solutions Company.
- Software: The Software business segment at IBM is responsible for the development and sale of various types of software. The majority of software that IBM offers is middleware and operating systems software. Middleware is software that allows IBM's clients to consolidate systems and applications across a single platform. Operating systems are the actual software that allows computers to run and operate. In addition to middleware and operating systems, IBM offers Product Lifecycle Management software that allows clients to optimize the processes through which they develop new products.
- Global Services: IBM’s Global Services, which provides IT infrastructure solutions, is divided into two segments: Global Technology Services (GTS) and Global Business Services (GBS). Through GTS, IBM offers strategic outsourcing services to reduce costs and improve productivity, maintenance and support for IT infrastructure, and systems integration. Through GBS, IBM offers consulting services for financial management, human-capital management, supply-chain management, and software development, management, and maintenance.
- Global Financing: In addition to offering financing services to commercial and individual clients, the Global Financing group also is in charge of the re-sale of leased and used products.
| Segment | Revenue (2008) ($B) | Gross Profit (2008) ($B) | Gross Profit Margin (%) | Percent of Total Revenue (%) | Revenue Growth (Decline) from 2007 (%) |
|---|---|---|---|---|---|
| Global Technology Services | 39.2[1] | 12.8[4] | 32.6[1] | 37.8[5] | 5.8[1] |
| Global Business Services | 19.6[1] | 5.2[4] | 26.7[1] | 18.9[5] | 5.1[1] |
| Systems and Technology | 19.3[1] | 7.4[4] | 38.1[1] | 18.6[5] | (10.8)[1] |
| Software | 22[1] | 18.8[4] | 85.4[1] | 21.2[5] | 8.2[1] |
| Global Financing | 2.6[1] | 1.3[4] | 51.3[1] | 2.5[5] | 0.3[1] |
| Total | $103.6[1] | $45.7[1] | 44.1%[1] | 100% | 4.9%[1] |
Sale of PC Business
In 2005 IBM sold its PC business to Lenovo, China's top PC supplier, in a $1.7 billion deal. Prices and margins on PCs had been falling as the PC market continues to become commoditized, so IBM divested itself of this business halfway through 2005. Since 2004 (the last full year of IBM PC production) IBM's gross profit rate has increased 5 percentage points and its operating margin has increased approximately 3.5 percentage points. IBM's hardware segment, which formerly included PCs, saw an increase of 3.5 points in its gross profit margin due to the sale of IBM's PC business. Also, if one excludes sales of PCs from IBM's 2005 revenue, total revenue increased 3.8% while revenue from the Hardware segment increased 4.8%.
Acquiring Growth
In 2006, IBM acquired over 10 companies in order to enhance its Software and Services segments. These companies ranged from software developers to service-oriented companies that offer business and technology solutions to clients. Specifically, IBM acquired several companies that specialize in developing information and systems management.
IBM also acquired six companies in Q1 2008 alone. These companies included the data duplication software developer, Diligent Technologies, as well as, the storage software company, FilesX.
On July 28th 2009, IBM acquired all stocks of the French company ILOC for approximately $340 million. This acquisition was a straight stock buyout of all outstanding shares of the company that specializes in software for 'business rules and optimization. The ILOG Business Rule Management System (BRMS), Optimization, Visualization, and Supply Chain Management (SCM) portfolios will build upon IBM software and business process management (BPM) leadership across a broad range of applications and environments.[6]
Integration of Supply Chain
Through the Global Services segment IBM help its clients increase the efficiency and flexibility of their supply chains through integration. In the same fashion, IBM has been working to integrate and optimize its own supply chain. Every year IBM spends approximately $36 billion through its supply chain to purchase products, materials and services across the globe. In recent years IBM has transformed its own supply chain to incorporate the company's supply, manufacturing, logistics, and customer fulfillment operations into one operating system in order to reduce inventories, convert fixed costs to variable costs, and improve the company's ability to respond to changes in the market.
Much of the savings IBM realizes as it integrates and optimizes its own supply chain turn into lower prices for clients, but some of the savings from lower costs lead to higher profitability for IBM. As IBM continues to develop new ways to help its client's optimize their own operations and supply chains, IBM will be able to apply these methods to its own operations and not only see higher demand for their innovative services but also realize lower costs.
Fiancial Results
IBM said on Monday, April 20 first-quarter revenue fell to $21.71 billion from $24.50 billion a year earlier. That compared with analysts' average forecast of $22.56 billion, according to Reuters Estimates.
Net profit for the quarter dropped 1 percent to $2.30 billion, from $2.32 billion in the year-ago quarter.[7]
In its 2nd 2009 quarter, IBM’s revenue decreased 15% to $23.2 billion compared to its 2nd 2008 quarter results. This was primarily due to a fall in revenue in all three of its business segments. Net earnings, however, rose 12% from $2.7 billion in 2008 to $3.1 billion in 2009 because it managed to reduce its operating costs.[8]
Trends and Forces
Contributions to Open Source
IBM is the largest contributor to open-source software (including Linux) projects, serving these projects with funds and resources through the IBM Linux Technology Center. This center employs over 600 engineers across the globe which work towards enhancing Linux and other types of open-source software. Currently IBM is working towards improving Linux's core functionality in order to serve a wider range of customers with varying demands more efficiently. All IBM servers have the capability of running on Linux systems making them attractive for a variety of clients.
Going beyond Linux
In 2006 IBM created 8 open-source software initiatives that go beyond Linux's current capabilities. IBM hopes these initiatives will allow IBM to provide better products for its current customers and to create new products to attract new customers. These new initiatives are based on open-source projects other than Linux such as the Eclipse Rich Client Platform project and Apache's Geronimo and Derby projects. The initiatives include ventures into middleware, web application servers, data servers, systems management, open hardware architectures, and grid computing.
Military contracts
IBM is currently working with the United States military on two separate, but similar, projects. One is the Global Autonomous Language Exploitation (GALE) project and the other is the Multilingual Automatic Speech-To-Speech Translator (MASTOR) software project.
GALE
GALE is a project funded by the Defense Department's new technology-centered sector, the Defense Advanced Research Projects Agency (DARPA). IBM is working on GALE with two other companies: SRI International and BBN Technologies. The goal of GALE is to develop technology to monitor, translate, and summarize various media presentations across the globe from Arabic and Chinese into English. The technology would be used to monitor television broadcasts, phone conversations, Websites and other types of communications.
MASTOR
The second military contract IBM is working on is the MASTOR project. The MASTOR project is designed to use technology to make up for the lack of translators in Iraq. The project's vision is to create technology that would allow an American medic or soldier to have a conversation with an Iraqi using MASTOR technology that would instantly translate each side of the conversation. For example, a US soldier trying to assist an Iraqi civilian could speak English into a microphone plugged into a computer or handheld that contained MASTOR technology which would replay the words of the soldier in Arabic. Then the Iraqi civilian could respond into the microphone and his words would be translated and played in English. The MASTOR project's technology is currently being tested in Iraq by the military.
Dependence on emerging markets
Emerging markets are important to IBM, as more than 60% of IBM's revenue comes from outside of the U.S. The markets that IBM is specifically targeting are India, China, Russia, and Brazil. IBM employed around 113,000 people in these countries. [10]
PC line divesture
In recent years the IT hardware industry has started to become commoditized, leading to falling prices and profits on most IT hardware products. PCs have been most affected by this commoditization, but other products that may soon face widely falling prices and profits include servers and other IT storage and networking devices. IBM has dealt with the commoditization trend by divesting its PC line and focusing its business on high-margin sectors like services and software. Also, IBM is still experiencing high margins in its servers and storage segment, boasting a gross profit margin close to 40% for its Systems and Technology Group in 2007. The company is protecting itself from possible server and storage commoditization however by putting an increased emphasis on developing new products and services as well as focusing on currently offered high margin products.
Investing in innovation
Through its Global Innovation Outlook (GIO), IBM has dedicated itself to being at the forefront of innovation in the technology industry. In 2007 IBM spent over $6 billion on research, development and engineering.[11] One of the most unique and potentially lucrative methods IBM is using to develop new products and services is the InnovationJam that IBM hosted in 2008. During two sessions totaling 90-hours over 90,000 people from across the world came together to discuss over 32,000 ideas for IBM to explore to address current-day problems and upcoming business opportunities.[12] After the discussions ended, IBM's engineers and employees selected the top 10 ideas and IBM assigned a top management officials to each idea and set aside $100 million to start researching and developing the ideas. Some of the selected ideas include real time translation services, integrated mass transit information systems, and healthcare payment smart cards. As many of the ideas are researched and potentially developed they could lead to significant industry breakthroughs and major sources of revenue for IBM.
Effect of the Global Recession
The global recession has affected all major industries across the globe. With budget pressures on customers, all IBM business segments have been affected. For the second quarter of 2009, the company has seen its revenues drop with a 13% decrease from $26.82 billion in Q2-2008 to $23.25 billion. However IBM has managed to increase its profit (by 12%) even in such an economy. This increase has been mainly attributed to the change in IBM's focus from hardware to software and services. With its divestment from the PC market, it has increased profit margins and with strong cost cutting initiatives managed to keep profits up even when revenues decrease.
The company is confident, and has increased its earnings outlook for 2009 to $9.70 per share from $9.20. It attributes this increase on the signing of new long term outsourcing contracts with customers (38% increase in number from previous year).[13]
Competition
Although IBM's main competitors are Hewlett-Packard Company (HPQ) and Dell (DELL), each of these companies has a different focus area. Dell makes most of its money on PC and server hardware, while Hewlett-Packard is more diversified as the leader in PCs and Imaging & Printing as well as offering IT services. Since IBM relies heavily on its Software and Services segment, it mainly competes with Hewlett-Packard in the servers and IT services markets and with Dell in the servers and software markets.
Despite falling behind HP in 2006 in terms of revenue, IBM is the leader in servers, IT services, and software. Also IBM leads HP and Dell in all measures of profitability, largely because IBM is focused on high-margin sectors such as services and software and has gotten out of the thin-margin PC business, in which HP and Dell are still heavily involved. With the global recession this divestment has proved to be beneficial for IBM with its profitability still growing even with a reduction in revenue.[13]
In addition to HP and Dell, IBM also competes with smaller IT consulting firms such as Accenture (ACN). However, IBM leads these companies by a large margin in terms of revenue, profitability, and scale. For example, in 2006 Accenture generated $18.2 billion in revenue and $1.8 billion in operating income, whereas IBM generated $48.2 billion in revenue and $13.3 billion in gross margins for its Global Services business unit.
| Company (2007) | Total Revenue ($M) | Gross Profit ($M) | Gross Profit Rate (%) | Net Income ($M) | Operating Margin (%) | Revenue Growth from 2007 (%) |
|---|---|---|---|---|---|---|
| IBM | 103,630[14] | 45,661[2] | 44.1[2] | 12,334[2] | 11.9[2] | 4.9[2] |
| Hewlett-Packard | 118,364[15] | 28,443[15] | 24.0[15][16] | 8,329[15] | 8.8[15][17] | 13.5[15][18] |
| Dell | 61,101[19] | 10,975[19] | 17.9%[19][16] | 2,478[19] | 5.2[19][17] | (0.5)[19][18] |
References
- ↑ 1.00 1.01 1.02 1.03 1.04 1.05 1.06 1.07 1.08 1.09 1.10 1.11 1.12 1.13 1.14 1.15 1.16 1.17 1.18 1.19 1.20 1.21 1.22 1.23 IBM 2008 10-K pg. 25
- ↑ 2.0 2.1 2.2 2.3 2.4 2.5 2.6 HPQ 2008 10-K pg. 49
- ↑ 3.0 3.1 IBM Reports 2009 Second-Quarter Results. IBM (July 16, 2009).
- ↑ 4.0 4.1 4.2 4.3 4.4 [Total Revenue x Gross Margin = Gross Profit]
- ↑ 5.0 5.1 5.2 5.3 5.4 [(Revenue/Total Revenue)*100 = % of Total Revenue]
- ↑ IBM completes acquisition of ILOG (01-06-2009). Retrieved on 2009-08-01.
- ↑ IBM revenue falls more than expected (4/20/09). Retrieved on 4/21/09.
- ↑ IBM 2009 10-Q2 (7/28/09).
- ↑ IBM 2008 10-K pg. 30
- ↑ IBM 2008 Annual Report pg. 53
- ↑ IBM 2008 Annual Report pg. 60
- ↑ IBM InnovationJam 2008. IBM. Retrieved on 06-29-2009.
- ↑ 13.0 13.1 IBM faces a Reluctance to Spend. Wall Street Journal Online (2009-07-20). Retrieved on 07/20/2009.
- ↑ IBM 2008 10-K pg. 19
- ↑ 15.0 15.1 15.2 15.3 15.4 15.5 HPQ 2008 10-K pg. 49
- ↑ 16.0 16.1 [Gross Profit Rate = (Revenue-COGS)/Revenue]
- ↑ 17.0 17.1 [Operating Margin=Operating Earnings/Total Revenue]
- ↑ 18.0 18.1 [Calculated using 2007 and 2008 numbers]
- ↑ 19.0 19.1 19.2 19.3 19.4 19.5 DELL 2008 10-K pg. 20
| ||||||
