Excerpts from analysis of IBM Global Services' 2005 results (Apr 14, 2006)

Annex Bulletin 2006-14 April 14, 2006

Excerpts from CONFIDENTIAL client edition

IT SERVICES

Updated 4/14/06, 5:00PM PDT; updates Outlook

Analysis of IBM Global Services' 2005 Business Results

Jewel Develops Patina

Profit Drops Sharply on Small Revenue Increase

SCOTTSDALE, Apr 14 - Big Blue's brightest crown jewel of the 1990s has developed a patina in the 2000s. The 2002 PwCC acquisition temporarily masked the IBM Global Services (IGS) weaknesses by boosting its revenue growth into double digits. But in 2005, the world's largest IT services firm returned to its old slow or no growth ways.

For the full year, IGS revenues rose 2.5% to $47.4 billion, or 52% of IBM's total. But pretax profits dropped 16% to $3.4 billion, for a 7% pretax margin. We estimate that last year's net earnings plunged even more steeply thanks to higher tax rates - down 22% to $2.2 billion, for a 4.7% net margin.

[snip]

Sales Slowdown, "Rescoping" and Backlog Issues

Meanwhile, back to IGS, as we've said many times since the start of this decade, IBM's services unit will have a hard time sustaining its growth without some major acquisitions. That's in part because IGS is losing business from the bottom end of its backlog. Here's what we said about its latest quarterly results (4Q05):

[snip]

Declining Profitability

So new contract sales shortfall and backlog shrinkage are two additional negative long-term factors that are slowing down IGS's growth. But they do not directly affect another troubling development, peculiar only to 2005 so far. Which is IGS' declining profitability. Nothing new there...

[snip]

Business Outlook

So what does the future hold for IGS? Well, we figure that 2006 will represent a modest improvement over 2005.

[snip]

Any additional growth spurts are unlikely without major acquisitions. And we cannot think of any that would truly enhance the quality of the IGS business and not just the quantity. So if Palmisano's emphasis on quality remains at the top of his strategic agenda, smaller will be probably better in IGS' case, too.

But this may be a hard concept to sell on Wall Street. The fact that the IBM stock is still lower today than it was a year ago, despite a significantly better quality of its business mix, is proof of it. Still, if IGS 2006 profitability were to improve as outline above, it would bolster Palmisano's case and IBM's stature on the Street.

[snip]

"That's all she wrote," we're afraid, for those of you who are NOT Annex Research clients, who are now reading the complete Annex Newsflash, along with all charts which back up our story.

Qualified media and friends of Annex may request a TEMPORARY User ID and Password by clicking here and explaining why they wish to have access to this particular Annex Bulletin. Or call Bob Djurdjevic at 602-824-8111 (cell) to promise not to copy it or otherwise republish it.

To find our how you can become one of our clients, and read the rest of this and other Annex Bulletins, click on . Thank you.

Annex clients click here

Happy bargain hunting!

Bob Djurdjevic

For additional Annex Research reports, check out... Annex Bulletin Index 2006 (including all prior years' indexes)

Or just click on and use "company or topic name" keywords.

Volume XXII, Annex Newsflash 2006-14
April 14, 2006

8183 E Mountain Spring Rd, Scottsdale, Arizona 85255
Tel/Fax: +1-602-824-8111

The copyright-protected information contained in the ANNEX BULLETINS and ANNEX NEWSFLASHES is part of the Comprehensive Market Service (CMS). It is intended for the exclusive use by those who have contracted for the entire CMS service.