Annex Bulletin 2005-14                      May 13, 2005

Excerpts from Confidential Client Edition

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IBM CORPORATE

Update to Annex Research’ Five-year IBM Forecast

Tweaking Big Blue

IBM Touts Its “Small Is Beautiful” Strategy (SMB, Emerging Markets), New Growth Businesses, But Message Falls on Deaf Ears on Wall Street

PHOENIX, May 23 – It was supposed to be Big Blue’s usual semi-annual dog-and-pony show for Wall Street analysts.  But the Friday (May 20) half-day session turned out to be much more than that.  After a disappointing first quarter (see “Slammed and Dunked,” Apr 2005), it was a chance for top IBM executives to demonstrate to investors that they’ve got a handle on the problems and a sound strategy to overcome them.

They did it by stressing the importance of the small and medium business (SMB) market, of  emerging (large) countries, of BPO (business process outsourcing), and of solutions and globalization in general. 

[snip]

The messages fell on deaf ears.  Despite such bullish comments, the IBM stock dropped about 1% at the start of trading; cut its loss in half mid-way through executive presentations; and then dropped again at the end of trading, even as the Dow Jones industrials average, of which IBM is a part, rose later in the day (May 20 – see the chart).

SMB Market.  One reason for Wall Street’s phlegmatic skepticism may be that there really wasn’t much new in IBM strategy or tactics.  The company has been talking about the SMB importance for over two years now (see “Finally Heard,” Jan 2003, “Finally Heard – Part II,” Nov 2003; “SMB Express,” [clients click here] Feb 2005, and our iSeries Whitepaper).  Can the leopard change its spots?  For, the results have not backed up IBM’s rhetoric. 

[snip]

BPO Market.  Another arrow in IGS’ (and, therefore, IBM’s) quiver is the business process outsourcing (BPO) market, which IBM calls Business Performance Transformation Services (BPTS). 

Like the SMB market, the BPO idea is nothing new.  Accenture, for example, has been pitching the concept since at least 1996 under the name “transformational outsourcing.”  Perot Systems called it “functional outsourcing” in about the same time frame (see the “Holy Grail” story, slide - Jan 2004).  As other vendors hopped on the BPO bandwagon, they tried to market it under new different names as if it were an original idea.

[snip]

Services Acquisitions.  Finally, IBM seems to have also heard us on the need for acquisitions in the services market:

“Looks like Big Blue is partially implementing our recommended “Save, Spend & Split”- growth strategy.  We first annunciated it two years ago, and reiterated it last April (see “Save, Spend and Split,” May 2003, and “Ditto, Ditto! Is Anybody Listening?”, Apr 2004).

IBM is spending some money on some (small) acquisitions in the services arena, and it has split off a major chuck of its unprofitable hardware portfolio (see “Good Riddance, Finally?,” Dec 2004).” 

(see “Quality over Quantity,” Mar 2005)

On Feb 2, for example, IBM beefed up its financial services unit’s “Lego collection” with an agreement to buy Equitant, a company that caters to clients looking to outsource their financial administration.  

[snip]

Software.  Like IGS’ Joyce, the head of IBM software, Steve Mills, also talked about downsizing of transactions.  “Our typical transaction size is now (only) $50,000,” he said. 

So IBM software unit faces similar challenges as does IGS – doing more for less.  But having been at it longer, and having been hardened in tough battles against vigorous competitors, IBM software already has an impressive track record of growth through acquisitions and partnerships.

[snip]

Hardware.  Bill Zeitler’s presentation on the company’s hardware strategy was probably the most upbeat and the most candid of all IBM executive comments. 

“After several years of outgrowing the market and gaining share, we turned in a very disappointing performance in the first quarter,” he said, not trying to mince words or come up with excuses. 

[snip]

Zeitler then stepped through his individual product lines’ strategies and remedies that have been put in place.  On the mainframe side, he noted that its security, integration qualities, along with new workloads (Linux, Java), would ensure that the zSeries resumes its upward march (just as we also noted in our zWhitepaper: “Poughkeepsie Spring”).

[snip]

Emerging Markets.  IBM’s discovery that the world’s major emerging markets (Russia, India, Brazil, China) may be the key to its future long-term growth, is perhaps the only relatively new strategy that Big Blue unveiled both on May 20, and on April 14, when it released its first quarter results.

[snip]

Solutions.  Elix and other IBM executives also talked about “solutions opportunity” as if it were a novel idea:

“Solutions are growing faster than the rest of the market. While point products will remain an important part of our business, we need to focus on high-value solutions to meet clients’ needs and drive our growth” – reads the sub-heading from a Doug Elix chart (see above).

Actually, IBM’s former CEO, John Akers, also sought refuge in solutions rather than products when he first ran into trouble 17 years ago:

[snip]

Summary & Outlook

IBM has already shifted its model from commodity-like businesses to higher-value-higher-margin operations through divestitures and a change of strategic emphasis, especially in the last three years, said IBM’s Loughridge, the CFO (see the above chart and “Quality over Quantity,” Mar 2005).

This trend will continue in the next four-to-five years, though the rate of the margin improvement will diminish over time (also see the forecast charts).

[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: Tweaking Big Blue (May 2005); Dell Rings the Bell (May 2005); Stock Buybacks: The Phantom Is Back (May 2005); EDS Misfiring on All Cylinders (May 2005);  HP Surges, Dell Slumps; Lenovo Completes IBM Deal (May 2005);  Capgemini Jettisons Healthcare in N.A. (Apr 2005); HP: From India to Poland (Apr 2005); IBM: Slammed and Dunked (Apr 2005); Hurd Advice: Up Mount Market Cap (Apr 2005); Accenture: Roaring Ahead (Apr 2005);  Fujitsu Unveils New Servers (Mar 2005);  EDS Executive Suite; HP's New CEO (Mar 2005);  An iSeries Revival (Mar 2005); EDS Booster Club Fees Rise (Mar 2005);  An Upside-Down View (Mar 2005);   The Worst of Both Worlds (Mar 2005);   Octathlon 2005: Accenture Wins (Mar 2005);  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 2005-15
May 23, 2005

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