IBM Develops Its Future

In my forecast for the latest financial report from IBM (NYSE: IBM  ) , I highlighted the company's international opportunites, and it seems management is on the same page. CEO Sam Palmisano proudly pointed to his company's geographic diversity, where EMEA (Europe, Middle East, and Africa) brought in revenues of $9.3 billion, nearly on level with the $11.1 billion of the combined Americas. The Asia-Pacific region contributed $4.8 billion to the top line, and sales growth in America is lagging that of every other geographic segment.

Palmisano said that IBM is "well-positioned in the growth areas of a changing IT industry, focused on our evolving business model, and poised for long-term success for our clients and shareholders." The technology business is not kind to laggards, and IBM clearly recognizes the importance of staying nimble as the landscape around the company changes. Right now, it's international growth and Web services that power the hopes at Big Blue; tomorrow, it could be support services or databases.

That's why the largest tech companies also hold prominent positions in lists of the biggest R&D spenders. If IBM, or Microsoft (Nasdaq: MSFT  ) , or Oracle (Nasdaq: ORCL  ) stopps paying engineers to develop new software, they've given up, and might as well become the next SCO Group (Nasdaq: SCOX  ) , hoping to make a living off lawsuits over decades-old patented innovations.

So I don't mind seeing R&D expenditures growing faster than sales. Yes, it cuts into the bottom line, which is what all the pundits are watching, but it's an investment in the future of the company, and indeed, of the tech business as a whole. IBM delivered on that mark, with 2006 R&D expenses 4.5% above 2005 levels -- a much bigger change than the 0.3% annual sales growth. $6.1 billion of research budgets should do nicely. Carry on, gentlemen; you have the right idea.

Further Foolishness:

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Fool contributor Anders Bylund holds no position in any of the companies discussed here. You can check out Anders' holdings if you like, and Foolish disclosure is always worth a read.


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