Annex Bulletin 2005-08                                       March 7, 2005

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IT SERVICES

Analysis of IBM Global Services’ 2004 Business Results

Smaller, Shorter - Better?

Strong Organic Growth (w/o Major Acquisitions) Will Be Hard to Come By

PHOENIX, Mar 7 – IBM Global Services (IGS), Big Blue’s erstwhile “crown jewel” and the growth engine of the 1990s, is sputtering again.  Not that its 8% growth rate in 2004 was bad, mind you, especially when compared to major competitors’, like EDS or Fujitsu.  And it matches the overall growth rate IBM reported last year.

But IGS is no longer driving IBM’s growth.  That’s the “new news.”  Its 8% revenue increase is a far cry from the double-digit annual surges to which we were accustomed in the early- to mid-1990s.

Besides, even the 8% rise is more than meets the eye.  Take away the favorable currency impact, and IGS’s real 2004 growth was about half of that amount.

[snip]

What’s IGS to do?

So what's IGS to do?

“For years IBM has stressed its ability, thanks to its large scale, to take on huge, long-term contracts that promise it steady streams of revenue for years to come,” the Wall Street Journal noted in a Feb 24 article on IGS. “But Mr. (John) Joyce (IGS’s head) said that IBM has discovered that smaller contracts are more profitable and are preferred by customers.”

Really?  That’s like discovering that the Earth is round.  Here’s, for example, what we recommended back in June 1996 to the late Dennie Welsh, the founder of IBM’s services business, on the subject of European market (the same principles, of course, apply elsewhere):

[snip]

Profit Boost from Maintenance

Furthermore, IGS, whose net margins are around 7%, is getting a profit boost from IBM maintenance.  We figure that the latter has net margins of about 19% - more than three times higher.  Which is why IBM chose several years ago to report maintenance as a part of IGS, thus making its erstwhile “crown jewel” looking better and shinier.

[snip]

Outlook

Since we’ve already done the revenue and P&L forecast for IBM, which included a segment on IGS, we incorporate it here by reference:

IBM Global Services.  After years of being the fastest growing segment of Big Blue’s business, IGS is likely to become a drag on IBM’s growth this year and next.  Unless, of course, John Joyce, IGS’s head, does something rather dramatic to turn things around. 

[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 (6 pages in print edition), along with all charts which back up our story.

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Happy bargain hunting

Bob Djurdjevic

For additional Annex Research reports, check out... 

2005 IT:  IBM Global Services: Smaller, Shorter - Better? (Mar 2005); IBM 5-yr Forecast: Quality over Quantity (Mar 2005); Rumor Lifts EDS', Fujitsu's Shares (Mar 2005); Capgemini: Turning the Corner (Feb 2005);  IBM Servers to Grow Again (Feb 2005);  Carly's Fickle Fans (Feb 2005);  CSC: Gearing Down on Purpose (Feb 2005);  EDS: Grossly Overpriced Stock (Feb 2005);  IBM Historical Update: 2004 Shot in the Arm (Feb 2005); New HeadTurners Series #1 (Feb 2005); IBM: A Crescendo Finale! (Jan 2005); Accenture: Strong Finish, Better Start (Jan 2005); Annex Coverage 2004: IT Services Dominate (Jan 2005)

2004 IT: EDS: The Titanium Stock (and other Wall Street tales) (Dec 2004); IBM PC: Good Riddance (Dec 2004); Fujitsu: Recovery Continues (Nov 2004);  IBM Server Renaissance (Nov 2004);  HP Hits Home Run (Nov 2004); Capgemini: Revenue, Stock Soars (Nov 2004); EDS: Jordan's Swan Song? (Nov 2004);  To Russia with Love and $ (Oct 2004); IBM: Slow Quarter No Longer (Oct 2004); Accenture: Revenues, Profits Up, Stock Down (Oct 2004); Capgemini: A Takeover Target? (Oct 2004); Sellout of America (Oct 2004); Spy Wars (Sep 2004); Outsourcing Boomerang (Sep 2004); EDS to Cut Up to 20,000 More Jobs (Sep 2004); Capgemini Stock Plummets on Unexpected Loss (Sep 2004); HP Savaged by Wall Street (Aug 2004); Moody's Lowers the Boon on EDS (July 2004); HP: Delivering Value Horizontally (June 2004); Accenture: Revving Up a Notch (June 2004); Beware Your CFO! (May 2004)IBM: Changing of the Guard (May 2004); Capgemini: Texas-size Home Run (May 2004); Following the Money (May 2004);  EDS: On a Wink and a Prayer (Apr 2004); HPS Wins by a Nose! (Octathlon 2004); Accenture: Burning the Track (Mar 2004);  IGS: "Crown Jewel" Restored? (Mar 2004); HP: Still No Cigar (Feb 2004); Cap Gemini: Another, Smaller Loss (Feb 2004); CSC: Good Quarter Gets Boos (Feb 2004); EDS: "Hot Air Jordan" Flaunts Flop as Feat (Feb 2004); IT Industry: Whither Goeth It? (Jan 2004); Cronyism Is Alive and Well at EDS" (Jan 2004)

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Volume XXI, Annex Bulletin 2006-07
March 2, 2005

Bob Djurdjevic, Editor
(c) Copyright 2005 by Annex Research, Inc. All rights reserved.
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