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An Analysis of IBM’s First Quarter Business Results

Going Retro with Mainframes

But Mainframe Bonanza Fails to Boost Big Blue; Services Growth Sluggish

PHOENIX, April 15 – Big Blue customers seem to be “going retro.”  They are once again gaga over mainframes.  That’s as if “Beatlemania” were back, and “I Wanna Be Your Man” were once again climbing the pop charts.

At least that’s the impression one would get from a 34% surge in IBM’s first quarter mainframe revenues.  The zSeries business, as the mainframes are called nowadays, was up 28% in constant currency.  Not bad for a 40-year old (see “Mainframe at 40!”, Apr 2).

Alas, if only these were the good old IBM days when the adage “as goes the mainframe, so goes IBM” applied.  Nowadays, mainframes account for a mere 5% of Big Blue’s revenues.  Thus, their (temporary) resurgence could do little to offset some more worrisome news from the company’s biggest business segment – IBM Global Services (IGS – which now accounts for more than half of IBM revenues).

What was the IGS worrywart?  Well, there were several…


IGS Backlog Losses

The third piece of bad news about IGS is that its backlog erosion continues.  At the year-end 2003, the IGS backlog stood at $120 billion.  Three months and $10.5 billion of new business later, its backlog was still $120 billion. 

In other words, the “rescoping,” expirations and cancellations ate up all of the new business that IBM had signed in the first quarter. 

Nor is this a new phenomenon.  Since March 31, 2003, IGS has closed $54 billion of new business, while its backlog went up by only $7 billion.  So it took $47 billion of new contracts just fill in the big black hole of contract terminations and/or “rescoping.”

Again, no surprise there…


Business Segment Analysis

Hardware. Hardware was the unexpected “hero” in IBM’s latest financial release.  Lead by strong sales of zSeries (up 34%), pSeries (up 15%) and xSeries (up 28%) servers and storage (up 16%), IBM hardware revenue surged by 16% in the first quarter (up 10% in constant currency).


Software. If hardware was an unexpected “hero” in the latest quarter, IBM software was a predictable winner.  Software revenues rose in double digits (up 11% as reported; up 3% in constant currency) to $3.5 billion.


Industries. After almost eight years of paying lip service to its best growth opportunity, IBM’s small and medium business (SMB) market is now leading all other vertical segments in revenue growth.  In the first quarter, it went up by 15% to $4.9 billion. 


Geographies. Asia/Pacific topped all IBM geographic segments in the first quarter revenue increase (up 16% as reported to $5.2 billion; up 6% in constant currency).



Just as was the case in the first quarter (see “IBM Hype Exceeds Results,” Jan 2004), the IBM executives sounded bullish, both in person (John Joyce), and in print (Sam Palmisano, CEO).

...Well, IBM executives get paid, and handsomely at that, for being enthusiastic.  But the market place wasn’t so sure.  The Big Blue shares dropped 3% in after-hours trading, and can be expected to be down when the market opens tomorrow.

So “going retro” with mainframes may be the fad of the moment with IBM’s largest customers.  And it may bring back nostalgic memories to those who created the most successful computer product line the world has ever seen.  But it does little to boost the IBM top and bottom lines. 

Resuming the growth of IBM Global Services is a “sine qua non” (a condition without which recovery won’t work, loosely translated from Latin).  It starts with stemming the IGS backlog losses, i.e., reducing the cancellations and “rescoping.”  It continues with some new strategic acquisitions.

Until that happens, look for the IBM stock to tread water, at best.


"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 (9 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... 

2004: Going Retro with Mainframes (Apr 8);  IBM: Five-year Forecast (Apr 8); Mainframe at 40! (Apr 2);  Accenture: Burning the Track (Mar 2004); "Crown Jewel" Restored? (Mar 2004); "Cap Gemini: Another, Smaller Loss" (Feb 2004);  "CSC: Good Quarter Gets Boos" (Feb 2004); "Hot Air Jordan" Flaunts Flop as Feat (Feb 2004); "Cronyism Is Alive and Well at EDS" (Jan 2004);  "Five Most and Least Likely Forecasts for 2004" (Jan 2004)

2003 IGS:  "IBM OnDemand: Different Strokes for Different Folks" (Dec 2003); "Investing in Growth" (Apr 2003)

2003 IBM: "IBM vs. HP: Spinning Global Server Market Shares" (Nov 2003);  "Finally Heard, Part II," (Nov 2003), “Small Is Now Big at Big Blue” (Oct 16),  “On the Nose But No Cigar” (July 16), “A Paler Shade of Blue” (June 2), “Save, Spend and Split” (May 8), “Shrunk by the Marketplace” (Apr 17), “Turnaround Continues...” (Apr 15), "Finally Heard!" (Jan 29), “Start of a Real Turnaround?” (Jan 17).

2002 IGS: "Half or Double Trouble?" (Aug. 12, 2002), "IBM to Take $500M Charge" (Sep 3, 2002), IBM-PwCC Update (Oct 2, 2002), Analysis of IBM Second Quarter Results (July 17, 2002), IBM Layoffs Confirmed! (Aug 14, 2002), Analysis of IBM Third Quarter Results (Oct 16, 2002), Boom Amid Gloom and Doom (Oct 10, 2002)

2002 IBM: “Gerstner: The Untold Story”  (Dec 27), "Gerstner Spills the Beans" (Dec 13), "On a Wing and a Prayer" (Oct 21), "IBM-PwC Tie the Knot" (Oct 2), Big Blue Salami (June 19), "Looming IBM Layoffs" (May 14), "IBM 5-Yr Forecast: From Here to Eternity?" (Apr 2002),  “Tough Times, Soft Deals,” (Apr 25, 2002), “Gerstner’s Legacy: Good Manager, Poor Entrepreneur” (Jan 2002), IBM Pension Plan Vapors: Where Did $17 Billion Go? (Mar 2002), "Sir Lou OutLayed Lay!" (Apr 1, 2002).

A selection from prior years: Is IBM Cheating on Taxes, Annex Bulletin 99-17 (May 1999),  IBM 5-year Forecast 2001: An Unenviable Legacy (June 2001) "Break Up IBM!" (Mar. 1996), Fortune on IBM (June 15, 2000), “Smoke and Mirrors Galore,” July 2000), "Slam Dunk of Bunk" (Jan 2000), Annex Bulletin 98-14 ("Wag the Big Blue Dog"), Armonk's Fudge Factory (Apr. 9, 1999)Where Armonk Meets Wall Street, Greed Breeds Incest (November 1998)Stock Buybacks Questioned: Is IBM Mortgaging Its Future Again?, 97-18 (4/29/97),  "Some Insiders Cashed In On IBM Stock's Rise, Buybacks" 97-22, 7/27/97,  Djurdjevic’s Forbes column, "Is Big Blue Back?," 6/10/97;  “Executive Suite: How Sweet!,” (July 1997), "Gerstner: Best Years Are Behind", Aug. 10, 1999), "IBM's Best Years Are 3-4 Decades Behind Us" (July 1999), "Lou's Lair vs. Bill's Loft" (June 1999),  "Corporate Cabbage Patch Dolls," 98-39, 10/31/98; Djurdjevic’s Chronicles magazine October 1998 column, "Wall Street Boom; Main Street Doom", “Louis XIX of Armonk,” (Aug. 1996), "Mountain Shook, Mouse Was Born" (Mar. 25, 1994), “A Nice Guy Who Lost His Compass” (Jan 26, 1993), “Akers: The Last Emperor?” June 1991), Industry Stratification Trend (Mar. 30, 1990) etc.]

Or just click on and use appropriate  keywords.

Volume XX, Annex Bulletin 2004-11
April 15, 2004

Bob Djurdjevic, Editor
(c) Copyright 2004 by Annex Research, Inc. All rights reserved.
e-mail: annex@djurdjevic.com

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