Annex Research| Annex Bulletins| Index 2003 | SearchFeedbackClips| Activism| Quotes|
The copyright-protected information contained in the ANNEX BULLETINS is a component of the Comprehensive Market Service (CMS). It is intended for the exclusive use by those who have contracted for the entire CMS service.

Excerpts from the Confidential Client Edition

Annex clients click here

IT SERVICES

Analysis of IBM Global Services’ 2002 Business Results

Investing in Growth

Net Drops Due to PwCC Acquisition Expenses; Gross Margins Steady; “As IBM’s Profit Dropped, IGS’ Importance Rose”

PHOENIX, Apr 30 - Despite the severe challenges IBM Global Services (IGS) faced in the 2002 marketplace, especially in the first half, especially with its large accounts (see Analysis of IGS 2001 Results, Apr 26, 2002), Big Blue’s “crown jewel” chalked up a respectable revenue growth last year (+4% to $31.3 billion[1]).  Credit IBM’s $3.5 billion mid-2002 acquisition of PricewaterhouseCoopers Consulting (PwCC) for most of it.  We estimate that PwCC contributed more than $1 billion in additional revenues to the IGS annual total (see IBM-PwCC Update, Oct 2, 2002). 

But the expenses associated with the acquisition also caused a net profit decline of 9% (to $2.1 billion).  Nevertheless, with a 7% net margin, the world’s largest IT services company is still likely to be a stellar performer in our annual Global IT Services Heptathlon, whose results are due next month.  That’s because most of IGS’ largest competitors have been mired in problems of their own, in addition to those caused by sluggish economies in the developed world.  

[snip]

Our report then goes on to analyze the strategic importance and the profitability of IBM's only "crown jewel" - IBM Global Services.

“Crown Jewel”

As our longtime clients may recall, we have been referring to IBM Global Services as Big Blue’s only “crown jewel” ever since our recommendation for an IBM break-up back in 1996 (see "Break Up IBM!", Mar 20, 1996).  The IGS business results can help explain why.

[snip]

Maintenance “Cash Cow”

IBM, by the way, does not break out the IGS income statement and balance sheet results (only revenues and pretax profits are reported, bundled with hardware maintenance).  So the figures that you are seeing here are our estimates.  Revenues and pretax profits, of course, do match up with published IBM data.

One reason we have been excluding hardware maintenance from the IGS business analysis is that this activity has more to do with hardware than value-adding IT services.  In fact, until just three years ago, IBM reported maintenance as a separate item in its financial statements.  It was only when the former CEO Lou Gerstner became desperate enough for a boost to its only “crown jewel’s” profitability, that maintenance was merged with Systems Integration part of IGS.

[snip]

Segment Analysis

Of the five horizontal IGS business segments, Outsourcing continues to outperform all others.  With revenues of $15 billion in 2002, this operation represents nearly half of the IGS total. 

[snip]

Summary and Outlook

The 26% revenue surge in the first quarter of this year should provide a pretty good indication of what’s in store for IGS in 2003.  The bulk of the percentage increase was due to the PwCC acquisition, of course.  Which means that such beneficial quarterly comparisons will wane after the end of this year.

Meanwhile, since downward economic pressures on consulting services continue to be felt across the global economies, we expect the BIS part of IGS to shrink about 5% in 2003 (to $8.9 billion) adjusted for full year’s pro-forma business results.  But this will be more than offset by a robust (double digit, 12%) growth in its biggest unit.  

[snip]

"That's all she wrote," we're afraid, for those of you who are NOT Annex Research clients, and who are now reading the complete Annex Bulletin (8 pages in print edition), along with all charts which back up our story.

Qualified media and friends of Annex may request a TEMPORARY User ID and Password by clicking here and explaining why they wish to have access to this particular Annex Bulletin.  Or call Bob Djurdjevic at 602-824-8111 (cell) to promise not to copy it or otherwise republish it.

To find our how you can become one of our clients, and read the rest of this and other Annex Bulletins, click on . Thank you.

Annex clients click here

Happy bargain hunting!

Bob Djurdjevic

For additional Annex Research reports, check out... 

2003: “Shrunk by the Marketplace” (Apr 17), “Turnaround Continues...” (Apr 15), “Start of a Real Turnaround?” (Jan 17)

2002 IGS: "Half or Double Trouble?" (Aug. 12, 2002), "IBM to Take $500M Charge" (Sep 3, 2002), IBM-PwCC Update (Oct 2, 2002), Analysis of IBM Second Quarter Results (July 17, 2002), IBM Layoffs Confirmed! (Aug 14, 2002), Analysis of IBM Third Quarter Results (Oct 16, 2002), Boom Amid Gloom and Doom (Oct 10, 2002)

2002 IBM: “Gerstner: The Untold Story”  (Dec 27), "Gerstner Spills the Beans" (Dec 13), "On a Wing and a Prayer" (Oct 21), "IBM-PwC Tie the Knot" (Oct 2), "Half or Double Trouble?" (Aug 12), Wall Street/Main Street Chasm (June 25), “Wall Street Casino,” (June 21), Big Blue Salami (June 19), "Looming IBM Layoffs" (May 14), "IBM 5-Yr Forecast: From Here to Eternity?" (Apr 2002),  “Tough Times, Soft Deals,” (Apr 25, 2002), “Gerstner’s Legacy: Good Manager, Poor Entrepreneur” (Jan 2002), IBM Pension Plan Vapors: Where Did $17 Billion Go? (Mar 2002), "Sir Lou OutLayed Lay!" (Apr 1, 2002).

A selection from prior years: Is IBM Cheating on Taxes, Annex Bulletin 99-17 (May 1999),  IBM 5-year Forecast 2001: An Unenviable Legacy (June 2001) "Break Up IBM!" (Mar. 1996), Fortune on IBM (June 15, 2000), “Smoke and Mirrors Galore,” July 2000), "Slam Dunk of Bunk" (Jan 2000), Annex Bulletin 98-14 ("Wag the Big Blue Dog"), Armonk's Fudge Factory (Apr. 9, 1999)Where Armonk Meets Wall Street, Greed Breeds Incest (November 1998)Stock Buybacks Questioned: Is IBM Mortgaging Its Future Again?, 97-18 (4/29/97),  "Some Insiders Cashed In On IBM Stock's Rise, Buybacks" 97-22, 7/27/97,  Djurdjevic’s Forbes column, "Is Big Blue Back?," 6/10/97;  “Executive Suite: How Sweet!,” (July 1997), "Gerstner: Best Years Are Behind", Aug. 10, 1999), "IBM's Best Years Are 3-4 Decades Behind Us" (July 1999), "Lou's Lair vs. Bill's Loft" (June 1999),  "Corporate Cabbage Patch Dolls," 98-39, 10/31/98; Djurdjevic’s Chronicles magazine October 1998 column, "Wall Street Boom; Main Street Doom", “Louis XIX of Armonk,” (Aug. 1996), "Mountain Shook, Mouse Was Born" (Mar. 25, 1994), “A Nice Guy Who Lost His Compass” (Jan 26, 1993), “Akers: The Last Emperor?” June 1991), Industry Stratification Trend (Mar. 30, 1990) etc.]

Or just click on and use appropriate  keywords.






 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Volume XIX, No. 2003-08
April 30, 2003

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

P.O. Box 97100, Phoenix, Arizona 85060-7100
TEL/FAX: (602) 824-8111

|Annex Research | Annex Bulletins | Quotes | Workshop | Feedback | Clips | Activism | Columns