IBM Looks Back At 2011 And Forward To 2015

March 19, 2012 Alex Woodie

One hundred was IBM‘s lucky number for 2011. For starters, last year was the 100th year that Big Blue has been in business. The company also got back to the $100 billion revenue mark for the first time since the economy imploded in 2008. In its recently released annual report, IBM discusses how it intends to replicate the market success that IBM had in 2011, and keep it going through 2015.

In her introductory letter to shareholders, new IBM CEO Ginni Rometty touted IBM’s recent success. She threw out a lot of numbers that undoubtedly impress stock analysts, such as 20 percent in operating pre-tax income, diluted earnings per share of $13.44, $18.5 billion returned to shareholders, and $6.3 billion spent on research and development.

But one of the most telling numbers was 90, which is the percent of IBM’s total profit that came from software, services, and financing. It’s no secret that hardware–as in business machines–isn’t a big driver of profit for IBM these days. In fact, it hasn’t been for years. While Systems and Technology Group brought in nearly $19 billion in top line revenue for the year, it accounted for only about 7 percent of the company’s $21 billion of pretax income. On the other hand, financing, which brought in just $2.1 billion in revenue, accounted for 9 percent of the profits. It never fails to amaze that IBM makes more money from acting as a bank than by designing, building, and selling computers, disk arrays, and assorted other electronic devices that bear the IBM name. But that is the modern IBM for you, and tomorrow’s IBM will be even more so.

These numbers are important because they give us a strong indication where IBM is going to invest and where it’s going to try and out-innovate the competition. It won’t ditch hardware–at least not in the foreseeable (only partly cloudy) future–since that would upset and confuse its customers in ways that would be detrimental to IBM’s most important income streams, which are heavily dependent on blue chip IBM I, AIX, and System z shops. The company is still investing in traditional businesses and doing semiconductor research and manufacturing to keep the midrange and mainframe lines going. But after you get past all the talk about “aligning business models” and “changing business mixes,” it’s clear that in the future, IBM will strive to find ways to combine its two big moneymakers–software and services–in new and creative ways.

The Four-Year Roadmap

The four-year roadmap displayed in IBM’s 2011 annual report has two components. First, and least importantly, the roadmap showcases the financial goals of the company. It’s no surprise that IBM plans to become more profitable. Exactly how profitable? Try $20 in earnings per share, or about 50 percent more profitable than it was in 2011. Much of this profit will go back to shareholders in the form of $20 billion dividends (which have increased every year for 16 straight years) and another $50 billion in share repurchases through 2015, IBM promises. Hitting these numbers is obviously IBM’s top goal.

That brings us to the more important component of IBM’s four-year roadmap–the technology and product offering part–which IBM will rely on to accomplish its primary goal of hitting its numbers (along with making the IBM company more efficient, but American employee’s productivity growth is now slowing, so IBM might have to look elsewhere [Mexico? Vietnam?] to hit its numbers).

IBM’s roadmap singles out four “growth initiatives” for the company, including: business analytics, cloud, Smarter Planet, and growth markets. It’s worth noting that “creating killer business computing platforms that will still be in use in 30 years” isn’t part of the new product mix, but then again, IBM has already been there and done that.

The growth markets refer to a focus on expanding IBM’s presence in specific geographic markets–places like the traditional BRIC countries (Brazil, Russia, India, and China) as well as Latin America, Singapore, and Africa. These growth areas are key for IBM because they accounted for half of the company’s growth in profit in 2011, and will drive even more growth in the coming years. IBM says it opened more than 100 new offices last year in growth areas, in the hopes of getting in at the bottom floor of their IT and process modernization.

Business intelligence and analytics are major areas of focus for IBM for a variety of reasons, not the least of which is that it has spent billions over the past seven years to acquire 28 companies in the field. IBM says analytics-related revenue increased by 16 percent in 2011 compared to the previous year–a large increase for any line of products at Big Blue–and that it employs almost 9,000 consultants in the field (out of more than 400,000 total employees worldwide). IBM could make even more money in this area if it found a way to make analytics more approachable and digestible for small and midsize businesses, but that has been a major challenge for decades.

IBM’s love affair with all things cloud is also nothing new, but now it’s starting to actually make money for Big Blue. The company says its cloud-related revenue increased by 280 percent last year (against a very small revenue base where big growth is easy), and that more than 1 million workers access IBM cloud services. Expect to see the name SmartCloud used a lot by IBM in the next four years, and expect to see revenue jump even more.

The final focus area for IBM is its Smarter Planet campaign, which is a clever name given to the largely one-off services work–such as monitoring electricity usage, rejiggering consumer goods supply chains, or creating a database of crime–that IBM has done for years. IBM’s timing with Smarter Planet jibes well with a renewed emphasis on infrastructure improvement here in the United States and throughout the growth markets where infrastructure management is a big issue for cities and countries. The feel-good nature of IBM’s TV advertising campaign to showcase its Smarter Planet solutions will likely accelerate IBM revenues in this field.

All in all, the annual report doesn’t contain any surprises. IBM is very intent on keeping its shareholders happy, which is no surprise considering its stock has increased by more than 100 percent over the last three years, and is now trading at an all time high. The product goals aren’t groundbreaking, and are continuations of what IBM is already doing. Apparently, talking too much tech scares off potential investors, who would otherwise invest in the latest social media stock or video game developer. There’s nothing easy or simple about creating and maintaining business systems, but if IBM is anything (or two things), it’s conservative and modest, and that won’t change even with a new CEO.