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Also, check out: "IGS Profits, Productivity Surge," "EDS: Growth Slows, Equity Grows,"  "CSC: A Mouse That Roars?", "A Solid Quarter", "EDS Sets New Records", "Andersen: Another Super Year", "Cap Gemini: The Most Improved?"

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SERVICES

 







 

Analysis of IBM Global Services 1998 Business Results:

Profits, Productivity Surge

As Revenue Growth Outpaces That of Costs, Expenses

PHOENIX, May 21 - After a costly expansion in the 1996-1997 period which sapped the profits while gaining market share for the IBM Global Services (IGS), 1998 was the year in which this IBM high flying unit managed to improve in all key business categories.

The 22% revenue growth was sufficient to enable IGS to gain another market share point relative to its top four competitors. And since it outpaced the increase of costs and expenses by almost a two-to-one ratio, the IGS 1998 growth to $23.7 billion in global revenues also helped boost its profits and sales productivity. We estimate that its net profit more than tripled since a year ago to just over $900 million, while its productivity went up by 11% to $188,300 per employee.

IGS also gained share in new business volumes as new contract signings surged from $24 billion in 1997 to $33 billion last year, pushing its backlog up to $51 billion.

In other words, 1998 was an all around great year for IGS. Relative to its past performance and to its competition.

Yet, when it's all said and done, all that IBM shareholders got at the bottom line out of nearly $24 billion of revenue was $921 million, for a 3.9% net margin. Now, compare that with about $1.9 of net profit, for an 18% net margin, which the Big Blue got from its $10.6 billion (and shrinking) server businesses in 1998.

Which means that the fast growing "new IBM" is 4.5 times less profitable than the traditional Big Blue business, which has been declining for years.

Business Segments

Among the IGS business segments, outsourcing continues to lead the way, both in terms of growth (+30%) and in absolute terms (34% of total revenue). Systems integration is the second largest segment accounting for 29% of the total business, but growing at a slower rate (+20%).

One of the remaining horizontal IGS business segments, the IBM Global Network has been sold to AT&T as a part of an intricate reciprocal outsourcing deal, announced earlier this year. As a result, this is the last time it will figure as a part our analysis of IGS' business results.

Geographic Segments

U.S. While IBM took over the global leadership in IT services after the fiscal year 1995, it is still the No. 2 vendor in the U.S. market. EDS is holding on to the No. 1 position, albeit by a whisker ($10.3 billion vs. $10 billion in revenue). If IBM continues to grow faster than EDS in 1999, chances are that the Big Blue will enter the new millennium as both the global and the U.S. champion of IT services. In the domestic market, however, there is a big gap between the top two companies and the No. 3 and No. 4 (CSC and Andersen Consulting respectively), each of which gets still under $5 billion in revenues from the U.S. market (CSC with $4.9 billion; Andersen with $4.3 billion).

IGS business in the U.S. is marked by a higher-than-global share of outsourcing revenues. Outsourcing accounts for 41% of the U.S. business as compared to only 29% in the international markets.

Europe. IBM and EDS are also the top two IT services companies in Europe, only in reverse order compared to the U.S. market. IBM is No. 1 with revenues of $8 billion; EDS is No. 2 with $4.7 billion in European business. But just as IBM has been closing the gap in the U.S., EDS has been doing in the European market, having managed to gain share both in lean times of the mid-1990s, and in good times for European services suppliers in the last two years.

Cap Gemini continues to be No. 3 European IT services vendor, having stretched its lead over the No. 4, Andersen, relative to 1997. In 1998, these two competitors had European revenues of $3.9 billion and $3.1 billion respectively.

As for IGS' horizontal segments in Europe, by contrast to the U.S. market, systems integration is the largest part, accounting for about one-third of the total. It is followed by outsourcing 20% share.

Asia/Pacific. IBM's dominance in the IT services business is the most pronounced in the Asia/Pacific market. Despite the general economic woes of the Asian economies, this is where the Big Blue holds an impressive 60% share among the top five global IT services competitors with revenues of $3.6 billion.

Yet A/P is another market where IBM actually lost share in 1998, most notably to EDS, whose revenues surged from under $1 billion in 1997, to $1.2 billion last year.

Happy bargain hunting!

Bob Djurdjevic

Other Charts

  • IGS 1998 Revenue - Horizontal segments - WW
  • IGS 1998 Revenue - Horizontal segments - U.S.
  • IGS 1998 Revenue - Horizontal segments - Europe
  • IGS 1998 Revenue - Horizontal segments - Intl.
  • IGS 1998 Sales productivity by horizontal segments
  • IGS 1998 Employment by horizontal segments
  • IGS Business Trends - 1991-1998
  • IGS Gross Margins - 1991-1998

Tables

  • IGS Financial Results - P&L 1996-1998
  • IGS Operating Results - Intl./Segment 1995-1998

Also, check out Annex Bulletins... "EDS: Growth Slows, Equity Grows,"  "CSC: A Mouse That Roars?", "A Solid Quarter", "EDS Sets New Records", "Andersen: Another Super Year", "Cap Gemini: The Most Improved?"

Annex Research is a well respected consulting firm serving the information needs of today's senior IT executives. For more information please call 602/824-8111.


Volume XV, No. 99-14
May 21, 1999

Editor: Bob Djurdjevic
Published by Annex Research;
e-mail: annex@djurdjevic.com

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