Strategic transformation of IBM

Last week, IBM announced its 2009 second-quarter results. Today Business Week's Gene Marcial discussed Why IBM Remains a Favorite stock pick.

On a call with the financial analyst community, Mark Loughridge discussed the strategic transformation of IBM's business and our ongoing shift to higher-value areas which has positioned us to better meet clients’ needs. Excerpts follow:

• "This performance (2Q 2009) is the result of the strategic transformation of IBM’s business. Since the end of the dot.com bubble, we’ve been moving out of commoditizing businesses, while investing in higher-value areas. This better positions us to meet clients’ needs, and drives a more profitable mix.



• [For nearly a decade] "we have been executing our strategy: shifting to higher-value segments, globally integrating the company, driving efficiency and productivity and investing to capture future growth. IBM is a fundamentally different company with a stronger portfolio of offerings and a more efficient cost structure, enabled by ongoing process improvements. Now in the current recession, we’re able to improve margins and profit – even with declining sales."



• "Since the 1990s, IBM has exited commoditizing businesses, including hard disk drives in 2002, PCs in 2005, and printers in 2007, (actions) which represent nearly $15 billion of annual revenue. In that same time, we acquired more than 100 companies for about $20 billion. This has clearly accelerated our shift to higher-value capabilities. This disciplined focus on shifting our business mix -- and our business model – has driven this turn-around in margins."



• "The shift in our business mix is even more apparent on a profit basis. From 2000 to 2008, the profit -- from Software and Services combined – has almost doubled … In 2009, we expect ongoing momentum in our Software and Services businesses."



• "We’ve also been globally integrating our company to improve productivity and efficiency. These transformational changes to our business have reduced our fixed cost base and improved the operational balance point, generating more profit from each dollar of revenue.



• "We’re using our strong profit and cash base to drive the significant investment needed to expand our base of opportunity, both organically and through acquisitions. This quarter we had great performance (from our acquisitions), with Cognos’ business analytics solutions, Telelogic's tools and ILOG’s business integration capabilities.

IBM's Software portfolio is built around high growth areas such as analytics, stream computing, instrumentation and monitoring of physical assets. The portfolio allows IBM to extend its software "footprint" beyond its traditional customer set to new, faster-growing revenue opportunities that are beyond the traditional IT industry.

Continued execution of a transformation strategy combined with a diverse software portfolio....its no wonder IBM's software revenue in 2008 totaled a staggering $22 billion.