Four more weeks of the economic meltdown has not changed IBM's tune. At the Goldman Sachs Technology and Internet Conference in San Francisco, IBM's chief financial officer, Mark Loughridge, said that January was just fine at Big Blue and affirmed the guidance the company has provided to a somewhat skeptical and skittish Wall …

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Friday 27th February 2009 06:02 GMT Ian Michael Gumby

Does this surprise you? Here's how they're going to do it....

First its no secret.

Companies can only delay critical projects for so long before they have to pull the trigger.

Outsourcing of operations is one way that companies can lower their IT costs and get a 'handle' on them. (Assuming that IBM can actually pull off the outsourcing)

That's on the sell side of the equation.

On the fulfillment side, IBM has and will continue to move their internal operations to lower cost countries. Like their North American Ops moved down to Brazil. The downside is that there's more pain internal to IBM, but not noticeable to the customer. Who cares if there's a 72 hour delay in the paperwork.... Then IBM will offshore as much of the outsourcing to cheap labor around the world. When they can't offshore the work, IBM will rely on Onshore tactics as well as H1B visas to get lower cost here in the US. Onshore meaning that they post an internal job opening that they can't fill so they relocate a lower cost worker who is an IBM employee to the US.

So its a margins game. IBM will continue to lose on Hardware, sell more software and make margins on the services.

Sam P is cutting the company to the bone to get his profitability up so he can cash out.

When he leaves, watch all the analysts short the shite out of IBM's shares.

The black chopper cause I've said too much and they know who I am. :-)

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Friday 27th February 2009 06:02 GMT al

No Morgan Stanley you are.

EPS of two companies is not an apples to apples comparison - not even close!

eg: a comapny splits it's shares 1:2. That doesn't impact the earnings; but it brings down the EPS by half. (as well as price of the share). Similarly a company buys back it's shares - the EPS goes up - again the earnings wouldn't (directly) get impacted by such a move. So for apples to apples comparison a good rule of thumb (not perfect) is P/E.

P/E for IBM: 89/8.93= 10.07

P/E for HP: 30/3.2 = 10.66

So HP is looking better for the investor at the moment.

Other parameters where you can do an apple to apple comparison is OPM of comparable businesses. eg: you may compare IBM's service business with HPs. Or server business with HPs.

Total revenue is another thing that you compare - as long as you don't include HP's non-overlapping businesses - printers and PCs (which would give HP an unfair advantage).

Paris, coz one would like to an overlap; do an apple to apple comparison and then split the share.

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Friday 27th February 2009 10:22 GMT al

erratum: No Morgan Stanley you are.

30/3.2 = 9.375. (And lower P/E assuming same rate of growth is better).

Paris again: coz regular one may need to repeat the overlap.

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Friday 27th February 2009 10:22 GMT Anonymous Coward

All good financial, where are the success stories?

Look closely at the speech, nothing related to how they have improved their customers lives or how they are going to grow supporting them. Yes, it was a financials meeting. But as Michael Gumby says, they are squeezing the company performance until the last drop.

Where I do not agree with Mr. Gumby is that those cost saving moves are very noticeable by customers. So much that they are starting to run away from IBM. Their quality of service is decreasing at the same rate their financial results are improving, if not faster. The "last drop" I refer to will come when they lose too many of their big customers to the likes of Dell and HP, both much more oriented towards listening to their paying customers.

When they moved away from hardware was because they could not keep the profit margins at the same service level as their competitors when manufacturing printers, desktops and laptops. Their service offerings are starting to see the same effects. This time, however, unless they transform themselves into a financial services and mainframe company, they will end up being a much, much smaller company.

I feel sorry for the great, competent and professional people that is still working in IBM. Even the ones in less costly countries will be taken by the storm, and they certainly were part of the IBM success.

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Friday 27th February 2009 10:22 GMT Anonymous Coward

Name

IBM is still International Business Machines because changing to Software or Services would make them IBS, which is also the acronym for Irritable Bowel Syndrom, and that wouldn't look good...

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Friday 27th February 2009 10:22 GMT Chris Miller

@Mr Gumby

"Outsourcing of operations is one way that companies can lower their IT costs"

Very few outsourcing activities result in lower costs*. Outsourcing is Sale & Leaseback by another name - it's just that it involves people and equipment rather than commercial properties. The aim is not to reduce costs, it's to capitalise future (probably increased) expenses to provide a one-off capital injection that can be disguised as a performance improvement and used to maintain senior mgt bonuses until the golden parachute kicks in.

*Those that do are usually where there are genuine economies of scale or the existing IT ops are truly FUBAR.

BTW How come the '08 EPS exceeds Pre-tax income? Did IBM get a big rebate last year?? (IANABeancounter!)

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Friday 27th February 2009 13:05 GMT Anonymous Coward

Machines?

I wonder who makes those x390s then.

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Friday 27th February 2009 13:07 GMT Matt Bryant

Bravo to IBM, and an interesting comparison....

.....but another point is that IBM used to make hp look like a minnow. It is hp that has grown though the '90s and dotcom bang to rival IBM. IBM has shed jobs and low-margin product ranges to concentrate on services, whilst hp has grown the traditional products and innovated in new low-margin products and services, and still managed to make a good profit in the areas IBM has chosen to ignore. Once hp was the David to IBM's Golaith, now it's more like two Goliaths with the IBM Goliath prefering to avoid many confrontations in order to survive. Both are shaping up to tough times in the downturn, andt it looks like the two titans will both be fine through the lean period.

An even more interesting conjecture would be that Sun is in a similar position as IBM was when it nearly went bust in the '90s, just on a smaller scale. Sun will have to make deep job cuts and dump unprofitable hardware busnesses to survive at all. It will be interesting to see if Schwartz can read the lessons of IBM's past or if it is already too late to avoid the sunset.

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Friday 27th February 2009 14:53 GMT Tom

There is no machine in IBM, just three letters

Lots of companies whose initials use to stand for something have dropped the meanings for the letters and just kept the acronym. Sometimes the same thing almost applies to acronyms for processes. I use to work for a company that made High Pressure Liquid Chromatography machines. While I was there it changed to High Performance Liquid Chromatography because they dropped to the pressures for some of the machines. But regardless of what the year was when I worked there, we always sold HPLC equipment.

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