IBM Is Dead. Long Live IBM!

This ain't your father's gray-suited, straightlaced International Business Machines (NYSE: IBM  ) . It's not all about presenting a professional front and collecting payment on mainframe megacontracts. Today, Big Blue is all about building relationships with its customers -- large or small. And that makes a big difference on the bottom line.

IBM reported fourth-quarter earnings this week, with total sales dropping 6% year over year to $27 billion, but earnings per share expanding by 17% to $3.28. Adjust the results for currency exchange changes, and the revenue stays nearly flat at a 1% swoon. The hardware-hawking IBM of yesteryear would not have held up nearly that well. Importantly, it's the most profitable segments that are doing well.

While systems and technology sales turned a 20% whiter shade of pale amid our global financial crisis, the rest of the company fared much better with a mere 2-3% drop. Luckily, the hardware side of Big Blue's house only accounts for a small part of total business nowadays. High-margin software sales and highly renewable service contracts accounted for 80% of sales. On top of that, gross margins are expanding in the service and software segments -- but shrinking when it comes to hardware.

Company spokesman Doug Shelton says that "This profit improvement is the result of the transformation that IBM has undergone over the last 6 years." The Armonks moved out of low-margin businesses like PC systems (here, Lenovo, take this) and hard drives (hey Hitachi (NYSE: HIT  ) , are you any good at this stuff?) and into "higher value services markets." Nowadays, mainframes and pSeries servers just sing backup behind real stars like online services platform WebSphere and collaborative productivity suite Lotus.

In the pursuit of new markets for these high-value products and services, IBM is aggressively selling to small businesses and local governments around the world. "We also reoriented our research organization to focus more heavily on our services business, having researchers work directly with services clients," says Mr. Shelton. Oracle (Nasdaq: ORCL  ) and SAP AG (NYSE: SAP  ) like to brag about multi-million-dollar deals, but an IBM press release is just as likely to talk about loosening up congested city traffic in Stockholm.

This puts a friendly, personal face on those stodgy old suits and ultimately gives IBM greater visibility of what users worldwide really want. It's a page ripped right out of Cisco's (Nasdaq: CSCO  ) very capable playbook. Today, IBM competes more directly with service swami Infosys (Nasdaq: INFY  ) than with server-happy Dell (Nasdaq: DELL  ) . And that's a good thing.

Further Foolishness:

Stock news, financial commentary, and your daily dose of Foolishness: Get plugged in to The Motley Fool on Twitter!

Dell is a Motley Fool Inside Value pick. Try any of our Foolish newsletters today, free for 30 days.

Fool contributor Anders Bylund holds no position in any of the companies discussed here -- but he is a certified IBM AIX sysadmin. You can check out Anders' holdings or a concise bio if you like, and The Motley Fool is investors writing for investors.


Read/Post Comments (10) | Recommend This Article (23)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 22, 2009, at 6:20 PM, Jimmy1492 wrote:

    "This ain't your father's gray-suited, straightlaced International Business Machines (NYSE: IBM)."

    That's the truth. In my father's day IBM preached something called "Respect for the Individual". Although, to be fair, even then they ignored it; my father was fired after 25+ years of service. Now the latest round of layoffs are going on and I'll be fired after 17+ years of service. Long live IBM ? Penny-wise and pound-foolish IBM.

  • Report this Comment On January 22, 2009, at 8:16 PM, faclark wrote:

    Yes this is not my father's IBM. IBM is in the process of laying off well over 10,000 employees, with 1400 in "high margin software group" group getting cut in the US and Canada yesterday. Two notable things: first, IBM just reported record financials across the board, great margins, huge cash hoard, record signings and huge order backlog - and wall street loved it, IBM stock up 10% yesterday. Second, IBM is attempting to do this sizable layoff in "stealth" mode - without announcement.

    It begs the question: how much profit and margin is enough ? Is now the time to be laying off thousands of successful, profitable employees into the worst job market since the great depression ? What sort of impression does that make to society about what kind of company IBM is ? I'll tell you my impression: they are cold, cruel and ruthless.

  • Report this Comment On January 22, 2009, at 11:03 PM, LowcarbNY wrote:

    When I was a kid there were many IBM execs in my neighborhood. I remember one telling me with pride when IBM recorded it's first billion dollar quarter.

    I looked at the lives these men were living and thought that IBM probably wasn't a bad company to work for.

    This sure isn't the IBM that they worked for.

    Fast forward to an engineering degree, graduation from college. IBM matched every other offer I got and the benefits were (emphasis on were) better.

    IBM was the cream of the crop. I worked hard and got rewarded. Heck I was often amazed at the awards and raises I got.

    Now I work even harder and contribute even more but the raises small or none. The security of thought that if you did a great job, great things would happen for you, is replaced by the fear that no matter how well you perform the axe may fall.

    Now the benefits have been cut, the pension is frozen, massive resource actions happen every 6-18 months and IBM is just another big company engaged in the race to the bottom.

    Yup, it isn't the same IBM that hired me.

    It isn't the same IBM that dominated the industry.

    Too bad.

    After earning more than $16 Billion

    The CEO actually addressed the employees via video web cast and said: "Many companies today are choosing a different path. They're instituting furloughs and pay freezes, even salary cuts — rather than focusing on what differentiates them in the market... or stepping up to their problems. But that's not strategic. It's a temporary solution. You're basically just battening down the hatches and trying to ride out the storm."

    He said this at the very time that thousands were being fired in the start of a massive resource action.

    How hypocritical is that?

  • Report this Comment On January 23, 2009, at 1:08 AM, Rowlf wrote:

    As yet another laid off IBM'er - I thoroughly agree.

    IBM has not had an innovative idea for the better part of a decade, the only way they make money is lay-offs, stock buybacks and acquisitions of other companies that actually make profitable technology products and the shell game is drying up.

    http://www.allianceibm.org

  • Report this Comment On January 23, 2009, at 4:11 PM, ryanmarina wrote:

    LowCarbNY - It's not hypocritical. "...furloughs and pay freezes, even salary cuts..." are not part of the IBM agenda. A furlough is temporary. IBM's Resource Actions are FOREVER. They still give raises (though not to everyone). And they will argue that those impacted by the ruling on Salary Exemption did not loose any pay despite the 15% paycut because the group as a whole had enough OT to make up the difference. The only other people they cut pay for were contractors - not employees.

    Be happy to have a job. If you cannot find happiness at IBM (or any company) then it's time to move on. No one has handcuffs on you. Hopes for a pension (which have been frozen or converted to a Cash Plan that you can take with you if/when you leave) are no reason to stay at a company/in a job that does not make you happy.

  • Report this Comment On January 26, 2009, at 1:29 AM, wyethc wrote:

    As a stock play, well, as PT Barnum said, there's a fool born every minute.

    As an employee, it's the tail wagging the dog, and this dog is getting old. Marketing can only promise so much and the leadership lacks vision to take this company into the Obama Age.

    Morale is low, purchased companies' technology do not play well in the sandbox with existing technology, and companies who purchase services are reaccessing budgets. Buddying up to customers who try to use all that virtualization (or the flavor of the quarter) technology is like poking yourself in the eye.

    IBM could be a great company, but it takes vision and a management to do the right thing. Until then, as the stock, it can only be mediocre.

  • Report this Comment On January 28, 2009, at 3:34 PM, postitgirl wrote:

    If you believe that "Big Blue is all about building relationships with its customers -- large or small", you are a fool.

  • Report this Comment On March 31, 2009, at 4:14 PM, walld wrote:

    Who's paying this guys bills? IBM!? IBM and companies like it are killing America. Their CEO brings home over $20 million in bonuses in 2008 but they continue to send jobs overseas with no stop in site.

    People need to decide how much is too much? What price are we paying so IBM can be competitive? IBM is losing respect and without a good reputation you can sell all the crap you want but no one is going to want to buy from you. IBM is about to find out the hard way that screwing with their employees is going to hurt them.

  • Report this Comment On February 19, 2010, at 1:49 PM, Minat69 wrote:

    Amen! IBM isn't making money because of their products....they are making money from laying people off and sending jobs to low pay workers.

    I know this for a fact because we were told that if we didn't lay off a certain number of US people in 2010 that our sector would not make their financial numbers. I almost fell over. That's the first confirmation in writing that IBM is actually depending on layoffs, excuse me, Resource Actions, to make money.

  • Report this Comment On February 19, 2010, at 1:51 PM, Minat69 wrote:

    Amen! IBM isn't making money because of their products....they are making money from laying people off and sending jobs to low pay workers.

    I know this for a fact because we were told that if we didn't lay off a certain number of US people in 2010 that our sector would not make their financial numbers. I almost fell over. That's the first confirmation in writing that IBM is actually depending on layoffs, excuse me, Resource Actions, to make money.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 814944, ~/Articles/ArticleHandler.aspx, 8/30/2014 10:43:52 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement