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IBM puts future profits in the bag

2009 and 2010 a done deal, thanks

Bridging the IT gap between rising business demands and ageing tools

A self-inflicted stress test

At the end of all the presentations by all of the heads of IBM's business lines - Global Business Services, Global Technology Services, Systems and Technology Group, and Software Group - CF Mark Loughridge went over the numbers and made it clear that IBM was not offering revenue projections for 2009 or 2010.

Loughridge joked that IBM had merely done its own "stress test" on its models and worked backwards to prove that cost-cutting measures already implemented in 2008 would bear fruit in 2009 and 2010, and that ongoing cost-reduction measures and other initiatives would allow Big Blue to hit its numbers, which the company originally laid out at its investor meeting in May 2007.

The $3bn (£2bn) in cost reductions that IBM achieved in 2008 will yield $1.51 (£1) in incremental earnings per share in 2009, and $6bn (£4) in share repurchases would yield another 31 cents per share.

IBM could, Loughridge added, do more if it wants to - or, I say, if it needs to if the economy heads more southward. IBM's model shows that it can sustain a 7 per cent revenue decline for all of 2009 and still make the $9.20 EPS figure. And in the first quarter, sales were down 3.8 per cent, and two-third of the decline was attributed to x64 commodity servers where IBM doesn't have much margin.

"In this kind of environment, I wouldn't trade this hand with anybody," said Loughridge, saying that IBM's annuity-like businesses - monthly license fees for software on mainframes, service and support for its hard and soft wares, outsourcing and business process services, and maintenance on all of its products - were "relatively sticky, relatively resilient, and relatively stable."

Here's the important part. Those annuity-like sales might have only comprised about half of IBM's overall sales in 2008, but they accounted for 62 per cent of its pre-tax income. IBM's transactional products - consulting engagements, one-time software licensing fees, systems integration gigs, hardware sales (both new and used), and other services - can decline by 13 per cent and IBM can still hit its $9.20 EPS number if the annuity-style sales stay flat. And Loughridge says IBM can hit the $10 EPS minimum target for 2010 if overall sales are down 7 per cent in 2009 and stay flat in 2010.

Now, if you're a Wall Street analyst who is being paid to call IBM's EPS numbers correctly, or an IBMer whose stock and other compensation is also tied to EPS, this is about as rosy a situation as any IT vendor is going to hand you in the next decade. IBM can - and will, if necessary - buy its EPS numbers.

And as an ace up its sleeve, Big Blue has its fingers in the $5 (£3.3) trillion pot of stimulus money the world's governments are ponying up - mostly in the United States and China, but elsewhere as well. IBM is selling what governments have been convinced through heavy lobbying by IT vendors that they want to buy.

Big Blue calls the idea Smart World and the IT behind it Dynamic Infrastructure, and it is creating the opportunity as much as it is chasing it.

"Opportunities change, and we are not going to stand still," explained Loughridge. "We went through our painful near-death experience and we have learned to follow opportunity."

Or, to make it where none exists, just like Big Blue has learned to manufacture EPS growth in a market where real profit growth is increasingly difficult.

At some point, the efficiencies gained through automation and offshoring run out. And that's why IBM is working to position itself less as International Business Machines and more as Infrastructure Business Monopoly.

But that's another story for another day. ®

Application security programs and practises

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