International Business Machines (IBM)

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See all Bulls Reasons Bulls: Reasons To Buy Wide international footprint 100% agree Wide international footprint IBM's revenue is widely distributed across the globe protecting it from economic downturns in single countries. View or Edit Reason 3 votes 100% agree Strength in emerging markets 100% agree Strength in emerging markets IBM has a firm establishment in key emerging markets which will pay off in the future as developing nations increase their demand for technology and services. View or Edit Reason 2 votes 100% agree Exiting PC business has helped keep margins high 66% agree Exiting PC business has helped keep margins high IBM wised up early to the commoditization of PCs and got out of the market before its competitors Hewlett-Packard (HPQ) and Dell (DELL), which will help IBM keep profits high in the long run in comparison to its competitors. View or Edit Reason 3 votes 66% agree See all 4 Bears Reasons Bears: Reasons To Sell "Q4 revenues were up, but mostly due to currency fluctuations" 0% agree "Q4 revenues were up, but mostly due to currency fluctuations" Fourth quarter revenues, 2007, were up 10%, but 6% of that growth was due to currency fluctuations that may or may not reverse next year. If I want to bet on a rising Euro I think I’ll play the currency rather than IBM. Worse, though short-term global... read more View or Edit Reason 0 votes 0% agree Q4 revenues were up, but mostly due to currency fluctuations 0% agree Q4 revenues were up, but mostly due to currency fluctuations Fourth quarter revenues, 2007, were up 10%, but 6% of that growth was due to currency fluctuations that may or may not reverse next year. If I want to bet on a rising Euro I think I’ll play the currency rather than IBM. Worse, though short-term global... read more View or Edit Reason 1 votes 0% agree Big Blue is slow to adapt 0% agree Big Blue is slow to adapt The IT industry is fast-paced and due to IBM's size it is hard for the company to completely adjust to major market changes. Plus, IBM's large investment in India will fail to produce results as the country is struggling to grow due to its poor infrastructure. View or Edit Reason 1 votes 0% agree Send the authors a comment or suggestion Be the first to make a suggestion See All Suggestions

Top Contributors Shawn Woodhull Michael Luddy Related Articles Hewlett-Packard Company (HPQ) Accenture (ACN) Open Source Dell (DELL) Commoditization of PCs

International Business Machines (NYSE: IBM) is a leading global technology firm that offers a variety of products and services in the information technology industry. In 2006 IBM lost its position as the number one IT company to Hewlett-Packard. In 2007 that lead widened as HP generated $104.3 billion in revenue while IBM's revenue came in at $98.8 billion. However, IBM is the worldwide leader in servers and IT services.

Although IBM lost its first place rank to Hewlett-Packard, IBM is a far more profitable business (boasting a gross profit rate of 42.2% and a 13.6% operating margin) than Hewlett-Packard (24.3% gross profit rate and 8.3% operating margin) or most of IBM's other competitors, including Dell and Accenture. There are several underlying factors that contribute to IBM's high profitability which has increased significantly in recent years. One of the reasons is that IBM has a product/service mix that is optimally profitable compared to the offerings of its competitors. In particular, IBM sold its PC business to Lenovo in 2005 as the PC industry is becoming increasingly commoditized, driving down prices and margins on PCs. Since selling off its PC line, IBM has re-focused its business around high-margin areas like software and IT services. IBM hopes to have software account for 50% of revenues by 2010. IBM does continue to remain dominant in the server market with a 36.7% market share, compared to HP's 27.7% market share. In addition to focusing on high-margin ventures, IBM has made efforts to integrate its supply chain and strive to stay on the cutting edge of innovation in the technology industry.

[edit] 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.

[edit] 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: The Global Services segment is divided into two sub-components: Global Technology Services (GTS) and Global Business Services (GBS). Through GTS and GBS IBM provides complete, end-to-end technology and business solutions for its clients, utilizing a mix of products from IBM and other suppliers. Offerings from the Global Services segment include outsourcing, systems integration, supply-chain management, maintenance, and application management services.

• 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.

[edit] 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%.

[edit] 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.

[edit] 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.

[edit] Trends and Forces

[edit] 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.

[edit] 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.

[edit] 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.

[edit] 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.

[edit] 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.

[edit] 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. In total, revenue from these markets grew approximately 21% in 2006. IBM wants to double revenues from emerging markets by 2010.

• India (2005-06 Revenue Growth: 38%): IBM is the largest global IT company in India with over 43,000 employees and $510 million in revenue in 2005. IBM is the leader in all hardware segments in India and is quickly working its way to the top position in the software and services markets. In the third quarter of 2006, IBM announced that it would increase its investments in India to $6 billion by 2009 in order to further establish itself in what is estimated to be the fastest growing IT market in the Asia Pacific region in the next few years. However, India's infrastructure is currently hindering growth as most roadways are too small to serve large volumes of traffic and most of the country is rural and undeveloped. With that said, in third quarter of 2007, India had a year over year growth of 30% (at constant currency).

• Brazil (19%): In 2005, IBM had over 8,000 employees and $1.5 billion of revenue in Brazil. IBM is a leader in servers, middleware, and IT services throughout Brazil. Brazil is a quickly developing economy with a young population (186 million people, average age only 29 years old) that is beginning to enter a workforce where 60% of GDP comes from services. As Brazil and its technology market grow, IBM is in a position to reap significant revenue and profits.

• China (16%): In 2005, IBM had over 8,000 employees and $1.5 billion in revenue in China. IBM is the leading provider of servers, storage, middleware, technology services, and strategic outsourcing in China. China's economy, like India's, is expected to continue to grow rapidly as the country experiences urbanization and more people leave the rural parts of China in order to move to major cities.

• Russia (21%): In 2005, IBM employed over 600 people and generated $250 million of revenue in Russia. As Russia's oil and gas industry drives infrastructure development, IBM is one of the main players in assisting the country's growth. For example, IBM has been critical in designing the control system for Russia's railways. As Russia continues to develop and its technology market grows IBM will be one of the main firms to see significant revenue growth.

[edit] 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.

[edit] 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. 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 2006. During two sessions totaling 72-hours over 150,000 people from across the world came together to discuss over 46,000 ideas for IBM to explore to address current-day problems and upcoming business opportunities. 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.

[edit] 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.

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.

[edit] References

• IBM Corp. Dividend History