International Business Machines (IBM)

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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 2009, that lead widened as HP generated $118.3 billion in revenue while IBM's revenue came in at $95.76 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 $43.8 billion for FY09) than Hewlett-Packard (gross profit of $28.4 for FY08).^[1][3] 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.^[2]

In 2009, revenue declined 7.6% to $95.8 billion due to declines in sales from growing markets.^[1]

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 and Financial Metrics

In the first quarter of 2010, IBM's revenue increased 5.3% to $22.86 billion. Its net income was $2.6 billion, 13% up from $2.3 billion in 4Q09. This growth was primarily due to an increase in software, hardware, and technology-services revenue. However, IBM's consulting contracts fell by 2%. They had 13 contracts greater than $100 million in 1Q10, down from 22 such contracts in 4Q09.^[4]

In the second quarter of 2010, IBM's revenue increased 2% from 2Q09 to $23.7 billion. Currency losses on the weak Euro reduced IBM's revenue by $500 million. In addition, there was a 12% drop in new servicing contracts to $12.3 billion. Outsourcing contracts also fell by 19%. Service and outsourcing contracts are important to IBM because they locki n revenue for several following years. However, short-term consultancy contract increased by 20% and its net income increased 9% to $3.4 billion.^[5]

Business Segments

IBM's business is divided into four major segments: Global Services, Software, Systems and Technology, and Global Financing. casss

Annual Report 2009^[1]

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.

In 2009, the Global Services segments' combined revenue decreased 6.6% to $55 billion due to a decreased demand for consulting. Global Technology Services revenue declined 3.9% to $37 billion. GBS's revenue declined 10.1% to $17.7 billion. Although Application Outsourcing signings increased by 21.7%, Consulting and Systems Integration signings fell by 10.2%.

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. Approximately 55% of the server and storage sales are through the company's business partners and the other 45% are directly to end-users.

This segment's revenue decreased 16.1% in 2009. The major products of this business, System z, Converged System p, System Storage, Retail Store Solutions, and Microelectronics, all posted double digit declines in revenue.

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.

Software revenue decreased 3.1% to $21 billion in 2009. While Key Branded Middleware increased by 1.1%, Lotus posted a 10% decrease in revenue. Demand for Lotus dropped due to many customer's consolidations and downsizing in 2009. Product Lifecycle Management revenue also fell 23%. In October 2009, IBM signed an agreement with Dassault Systemes in which IBM will acquire the companies sales, client support operations, customer contracts, and assets related to Product Lifecycle Management. The transaction will be completed in the first quarter of 2010.

Global Financing

Global Financing offers financing services for IBM customers when they purchase IBM systems, software, and services. Global Financing also provides commercial financing to dealers of IT products. This group also sells and leases used equipment.

Global Financing's total revenue decreased from $4.5 billion to $4.1 billion in 2009. External revenue fell by 10% due to decreases in financing revenue and used equipment sales. Internal revenue declined 6.3% because of a 22% decline in financing revenue. Profit for this segment decreased 1.7% due to the drop in revenue.

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.

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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 2009 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.^[6]

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 2009 Accenture generated $18.2 billion in revenue and $1.8 billion in operating income, whereas IBM generated $58 billion in revenue for its Global Services business unit.

References

• IBM Corp. Dividend History

1. ↑ ^{1.0 1.1 1.2 1.3} Template:Cite Annual Report
2. ↑ ^{2.0 2.1} HPQ 2008 10-K pg. 49  
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5. ↑ [You must specify title = and url = when using {{cite web}}.. Retrieved on 2010-07-19.
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7. ↑ ^{7.0 7.1 7.2 7.3 7.4} IBM 2008 10-K pg. 19  
8. ↑ ^{8.0 8.1 8.2 8.3 8.4} HPQ 2009 10-K pg. 49  
9. ↑ ^{9.0 9.1 9.2 9.3 9.4} DELL 2008 10-K pg. 20  
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