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How International Business Machines Corporation Makes Most of Its Money

By Anders Bylund - Jun 27, 2017 at 9:35AM

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Big Blue is changing its business model on a fundamental level. Here's a snapshot of where the IT titan stands right now.

IT giant IBM (IBM -3.92%) collected revenue of $79.9 billion in fiscal year 2016. Nineteen percent of those top-line sales, or roughly $15.4 billion, remained on the income statement as operating profits.

Let's have a look at how Big Blue generates those results through its five reportable business segments -- and one unofficial but very important classification known as IBM's "strategic imperatives."

IBM by the numbers in 2016

Metric

Technology Services and Cloud Platforms

Cognitive Solutions

Global Business Services

Systems

Global Financing

Total

External revenue

$35.3 billion

$18.2 billion

$16.7 billion

$7.7 billion

$1.7 billion

$79.6 billion

Operating income

$4.7 billion

$6.4 billion

$1.7 billion

$933 million

$1.7 billion

$15.4 billion

External operating margin

13%

35%

10%

12%

98%

19%

Data source: IBM.

This list excludes $6.3 billion of revenue billings from one IBM division to another, where cognitive solutions account for 41% of internal billings and financing stands for another 29%.

I'm also leaving out $289 million of revenue that fell between the cracks of these five divisions, alongside approximately $3 billion of operating expenses not attributed to any of the operating segments. This is the financial glue that holds the Big Blue machine together, including top-level expenses like executive salaries.

IBM logo on the Watson research center in Munich, Germany.

Image source: IBM.

What these numbers mean

Technology services account for nearly half of IBM's annual revenue and 30% of its operating income. About 41% of the company's segment-level profit comes from cognitive solutions. The systems division, which includes IBM's z Systems mainframes and Power midtier servers, has seen its sales fall from $12.3 billion two years ago. Some of that hardware decline comes from the usual cycle of strong sales when IBM presents a new generation of mainframe systems, but the company has also been selling off its hardware systems operations piece by piece.

Hidden behind all of these figures, IBM's strategic imperatives accounted for $33 billion of top-line sales in 2016. That's up from $29 billion in 2015 and $25 billion in 2014, and management hopes to reach $40 billion in fiscal year 2018. In other words, these operations are enjoying accelerating sales growth and should represent more than half of IBM's total sales next year.

Strategic imperatives consist of IBM's businesses in cloud computing, data analytics, mobility, and social networks. These concepts are tucked into Big Blue's reportable segments, driving growth everywhere they go.

Driving deeper into the strategic imperatives is redefining IBM and its overall business model as we speak. Come back in a couple of years, and I bet IBM will have reorganized into a new set of reporting segments that hews closer to what's working best inside the bundle of strategic imperatives.

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