<%@ LANGUAGE=VBScript %> <% Set asplObj=Server.CreateObject("ASPL.Login") asplObj.Protect Set asplObj=Nothing %> Analysis of IBM's 4Q07 business results (Jan 14, 2008)

Annex Bulletin 2008-01                             January 14, 2008

An OPEN CLIENT edition


All Lines Point Up Except for Stock Price (Analysis of Accenture's 1Q08 results)

Microsoft Still Wall Street Darling (Analysis of institutional holdings of Top 10 IT Cos)



Updated 1/14/08, 9:30AM; adds Unwarranted Pessimism...

Analysis of IBM's Preliminary 4Q07 Business Results

Big Blue Shines in Fourth Quarter

IBM Surprises Wall Street on the Upside, Stock Surges

New IBM Reorganization Focuses on Customers, SMB; Back to the Future

SCOTTSDALE, Jan 14 The last time IBM made a double-dipper quarterly earnings announcement, the stock got slammed, pulling down the entire IT sector and much of the rest of the market (see "Slammed and Dunked, Apr 2005").  Early this morning, IBM did the reverse.  Big Blue proved it still had plenty of market power left when it released its fourth quarter preliminary revenue and earnings figures three days ahead of the scheduled announcement.  And the stock surged more than eight points in pre-opening trading to around $106 as the strength of IBM's business caught Wall Street by surprise (see the chart).

IBM said its fourth quarter earnings from continuing operations rose 24% on a 10 increase in revenue.  IBM said 6 percentage points of its revenue increase was due to the weaker dollar, suggesting other U.S. firms with overseas customers could enjoy a similar currency benefit.  The early risers among the stock traders applauded the news by bidding up Big Blue shares, buoyed by its earnings report amid the general market uncertainty, especially in the financial sector. 

Unwarranted Pessimism: IBM Stock Is Still Worth $125 or More

We have been saying all along that Wall Street was perhaps unduly tarring IBM with the financial sector's malaise brush after the third quarter slowdown in IBM's mainframe business.  Subsequent stellar results by HP and Accenture, for example, hinted that investors may have read too much into it, and were unduly pessimistic about the IT sector and Big Blue in particular.  Today's IBM announcement proved that in spades.

For, it is now evident that IBM is putting its money where its mouth was - by growing aggressively in the SMB and the emerging markets that are the growth engine of both the U.S. and global economies.  And that trend is only likely to accelerate through 2008 and beyond as the organizational changes that IBM just announced take hold (see below).

We have been saying since Nov 2006 that IBM stock is worth around $125 or more (see IBM: A $125-Stock... ).  We still think so.  The only thing that has been changing was investor perceptions, first down (since Oct 2007), and now back up.  Wall Street had also  seemed to agree with our $125 assessment prior to IBM's 3Q07 release (see "On the Button Again, Oct 2007), as it drove the stock up to the $121-range.  But then it backed off, fearing IBM may be swept up in the U.S. banking industry crisis.  Now that they can see such fears were unwarranted, investors are jumping back into the Big Blue bandwagon. 

IBM plans to provide detailed fourth quarter earnings results on Thursday (Jan 17).  Meanwhile, Big Blue's preliminary results have already given the Dow Jones a lift this morning.  The most popular Wall Street index has been up by over 100 points since the opening, mostly on account of the positive IBM news.

Back to the Future: New IBM Reorg Focuses on Customers, SMB

Meanwhile, IBM's latest organizational changes that the company announced internally in the last two weeks promise to strengthen its business even more in 2008 and beyond.  That's because they put the customer front and center, especially the SMB (small and medium size business) customer, the fastest growing segment of the U.S. and world economies. 

The head of IBM hardware Bill Zeitler said in a Jan 3 letter to the Systems Technology Group (STG) employees that the purpose of the new organizational structure is "to move to a client-centered structure -- top to bottom."

"A client-focused model will enable us to extend our enterprise leadership, accelerate our growth in SMB, and exploit new embedded and OEM opportunities outside the traditional IT market," Zeitler said.

In a similar move, Steve Solazzo, the head of IBM's global SMB business, unveiled last week to its employees a new organization that splits up IBM's SMB into "Enterprise Clients" (the high end) and "Mid-Market Clients" ("true SMB") as we said in our Nov 2006 report that recommended that IBM split up its SMB business so as to be able to give smaller companies more TLC (Tender Loving Care), as they represent a bigger growth opportunity for the company, both in the U.S. and globally.

In announcing the new organization, Solazzo said that IBM has set aside about $100 million for marketing to the SMB customers.  This will include new branding, as IBM will change the name of this part of the company from SMB to General Business.

Students of IBM history may realize that in doing this, the company is taking a trip "back to the future."  About 34 years ago (in 1974) IBM made a similar move when it set up a General Business Groups whose mission was to develop and grow the small and medium size business market.  The System i (a.k.a. AS/400) owes its heritage to that move, although the first IBM "SMB" product (S/3) was actually launched in 1969.

The two IBM moves complete the implementation of a recommendation we made in November 2006, when we said that IBM should have a separate organization ("Baby Blue") dedicated to the needs of the SMB customers (see "From Little Acorns Mighty Oaks Grow , Nov 2006 - analysis IBM's "State of the Union").

Happy bargain hunting!

Bob Djurdjevic


  • ENTERPRISE segment: Customers in IBM's "Enterprise" segment (typically 1000+ employees) with complex I/T requirements, robust I/T staffs, who prefer to buy directly from IBM and they demand a deep knowledge of their industry.  
  • MID-MARKET segment:  Customers with typically under 1,000 employees who have smaller I/T staffs, less self-integration capability and they frequently prefer to buy from other local mid-sized businesses (e.g., business partners).  These offerings will be delivered via a strategy that emphasizes heavy marketing/demand generation investment, a strong ibm.com telecoverage presence and a heavy reliance on Business Partners for local integration.  


The new STG organization will look as follows:

Client Segments

  • Enterprise Systems (large enterprise clients) led by Jim Stallings
  • Business Systems (small and mid-market accounts) led by Erich Clementi
  • Industry Systems (clients in areas like retail, telecommunications, and healthcare, where IT is often embedded in processes beyond the traditional data center) led by Curtis Tearte
  • Microelectronics (our pure technology clients -- e.g., custom microprocessor and ASICs -- who leverage our industry-leading systems, process technology, and ecosystem of alliances) led by Adalio Sanchez


    • Mainframe, led by Anne Altman

    • Power Systems (System p, System i and Linux on Power), led by Ross Mauri
    • Modular Systems (System x and IBM BladeCenter), led by Rich Hume
    • Storage, led by Andy Monshaw

Sales team model

Each of the client sets will be supported in the regions and IMTs (integrated sales teams), led by more than 300 Systems Sales Managers, who'll have complete STG product responsibility for a set of clients.


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Volume XXIII, Annex Bulletin 2008-01
January 14, 2008

Bob Djurdjevic, Editor
(c) Copyright 2008 by Annex Research, Inc. All rights reserved.
e-mail: annex@djurdjevic.com

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