Is IBM Representative of Tech Sector?

The other day (IBM) pre-announced their fourth quarter earnings. The NASDAQ and the entire tech sector jumped on the good news that was presented. Thursday after the close, they provided positive forward guidance, saying 2008 profit would rise in the neighborhood of 15% to 16%. This exceeded analyst expectations and gave the stock a nice bump up in after hours trading.

The positive outlook on 2008 may provide an excuse for a market-wide rally or at least a tech sector rally. But really, can it be said that IBM is a fair representation of the market or the entire tech sector?

I'll try to answer this question by reviewing IBM's business segments, organization, workforce and customer base.

Business Segments --

Looking at IBM's business segments, it can be seen that they offer far more coverage of the technology space that those of the typical tech company:

Global Services - this is the segment responsible for installing technology-based solutions at client companies. Within Global Services there are two reportable segments:

Global Technology Services - provides infrastructure services through the company's global scale, standardization and automation. It includes outsourcing services, Integrated Technology Services and Maintenance.

Global Business Services - provides professional services, delivering to clients solutions which leverage industry- and business-process expertise. It includes consulting, systems integration and Application Management Services.
Systems and Technology Group - provides IBM's clients with business solutions requiring advanced computing power and storage capabilities. Includes server and storage sales, semiconductor technology and products, packaging solutions and engineering technology services for clients and for IBM's own advanced technology needs.

Software - consists primarily of middleware and operating systems software. Sales can be based on a one-time charge or include arrangements that provide annual maintenance and licensing fees.

Global Financing - intended to generate a return on equity and to facilitate clients' acquisition of primarily IBM hardware, software and services. Supports direct sales via loans and leasing to end users and internal clients, commercial financing for dealers and remarketers and selling and leasing of used equipment.

Companywide Organizations --

The following three companywide organizations play key roles in IBM's delivery of value to its clients:

• Sales & Distribution Organization and related sales channels
• Research, Development and Intellectual Property
• Integrated Supply Chain

Sales & distribution organization - utilizes geographic organizations in the Americas, Europe/Middle East/Africa and Asia Pacific geographies.

Research, development and intellectual property - IBM annually spends approximately $6 billion for R&D. The company's investment in R&D was approximately 15 percent of its combined hardware and software revenue. R&D also results in intellectual property (IP) income of approximately $1 billion annually. Some of IBM's technological breakthroughs are used exclusively in IBM products, while others are licensed and may be used in either/both IBM products and/or the products of the company.

Integrated supply chain - IBM leverages its supply-chain expertise for clients through its supply-chain business transformation outsourcing service to optimize and help run clients' end-to-end supply-chain processes, from procurement to logistics.

Workforce --

IBM's workforce is represented in all geographic areas and totals approximately 360,000. India has shown the greatest growth in hiring, up 16,000 to approximately 52,000 employees by the end of 2006.


Customer base --

The majority of IBM's revenue, excluding the company's original equipment manufacturer technology business, occurs in industries that are broadly grouped into six sectors:

• Financial Services: Banking, Financial Markets, Insurance
• Public: Education, Government, Healthcare, Life Sciences
• Industrial: Aerospace and Defense, Automotive, Chemical and Petroleum, Electronics
• Distribution: Consumer Products, Retail, Travel and Transportation
• Communications: Telecommunications, Media and Entertainment, Energy and Utilities
• Small and Medium Business: Mainly companies with less than 1,000 employees

Conclusion --

IBM is just so big and diversified that there is little comparison between it and most other tech companies. Small-cap tech names, for example, a focused semiconductor company like RF Micro Devices (RFMD) or a modest software vendor like Concur Technologies (CNQR) are nowhere near in the same league. Even the large-cap tech names like SanDisk (SNDK) can't compare. IBM is a member of an elite group of companies like Cisco Systems (CSCO), Microsoft (MSFT), Oracle (ORCL) or Hewlett-Packard (HPQ).

IBM's wide international coverage and deep technological capabilities dwarf those of most tech companies. Not only do they have sales organizations worldwide but they have developers, consultants, R&D workers and supply chain workers in each geographic region. Their product mix runs from custom software to packaged enterprise software, hardware (mainframes and servers), semiconductors, databases, middleware technology, etc., etc. There are few tech companies that even attempt to support that many kinds and variations of products.

IBM's services business brings in billions in revenue. There are few tech companies that can compare in this area unless their main focus happens to be consulting and services, like EDS, for example.

As color on the fourth quarter earnings announcement, there are a couple of observations that I would like to make. The first one speaks to IBM's international prowess. The company indicated that growth in the Americas was only 5%. International sales were a primary driver of IBM's good results. As an insight on the difference between IBM and most other tech companies, it is clear that nowadays, a tech company that isn't adept at selling internationally is going to be in trouble. And buried in IBM's announcement was the admission that hardware sales had declined in the fourth quarter. What does that say for other hardware manufacturers?

So, bottomline, IBM's fourth quarter earnings were fine and their outlook for 2008 is quite positive. The whole stock market, being oversold, will probably rally again. My feeling, however, is the rally cannot be long-lived because, as this post demonstrates, IBM is not at all representative of the tech sector let alone the market in general.

Comments

[deaverb]

Well thought through. Helpful.

[TradesRTricky]

Given that, why doesn't The Street appreciate IBM's results more? Had they missed forecasts, they would've been unmercifully punished, but the contrary doesn't apply apparently. Shouldn't this stock be greatly rewarded with such positive news under this unstable market?

[Q. A. SAMAD]

AWESOME.