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Chairman’s letter

Dear IBM Investor:

I am very pleased to report to you on a superb year for your company—a year of record revenue, profit, cash flow and earnings per share. It reflects the hard work of some of the world’s brightest and most innovative women and men—the IBMers I’m proud to call my colleagues. It is also the result of important strategic choices we made several years ago—choices that have put IBM in a strong position to continue to grow profitably, to strengthen our client relationships, and to seize the most attractive opportunities in a very dynamic global economy.

IBM is a different company today. To understand why, let me briefly describe how we got to our present position.

At the beginning of the decade, all of us in the information technology industry—indeed, in all of business—were confronted with fundamental changes: the reality of global integration, a new computing model and new ways for businesses and institutions to apply technology to create value.

It was clear that we had to change—and not only to capture future opportunities. The fact is, if we had stayed still, the company’s competitiveness would have been at risk. So we made important decisions, and got to work.

Global integration: As the decade began, we observed the accelerating integration of global economies, and with it the emergence of two important—I would say historic—opportunities. We had a chance to capture rapid growth in dozens of countries as they invested heavily in information technology to modernize their societies. And we could also tap into enormous populations of skills all over the world. We set out to seize both opportunities.

We’ve made major investments in emerging markets, building up our teams in nations all over the world. At the same time, we have been globally integrating IBM’s operations rapidly, locating our work and functions wherever it makes the most sense, based on the right cost, the right skills and the right business environment. Today we have a truly global supply chain; we develop software globally; our network of research laboratories is worldwide; and we deliver services on an unmatched global scale. We are continuing to transform our processes and functions to move IBM to this profoundly new model of the corporation, which we call the Globally Integrated Enterprise.

Results from Continuing Operations

Revenue($ in billions)
03 04 05 06 07
89.1 96.3 91.1 91.4 98.8
Income ($ in billions)
03 04 05 06 07
6.6 7.5 8.0 9.4 10.4

Technology: IBM has been saying it for many years: The basic computing model has changed. The PC model of the 1980s has receded in importance to clients, and has been replaced by a new paradigm, based on openness, networks, powerful new technology and the integration of digital intelligence into the fabric of work and life.

As you know, we have dramatically changed our mix of products, services, skills and technologies. We exited businesses like PCs and hard disk drives—businesses that we had invented. We shifted our internal R&D and have made more than 60 acquisitions over the past five years. At the time, many were skeptical—but one need only look at today’s headlines to see how strongly some PC-era leaders are trying to move away from the old model and embrace the new one.

IBM’s product and technology portfolio today is built around networked, modularized and embedded technologies, including service-oriented architecture (SOA), information on demand, virtualization and open, modular systems for businesses of all sizes. IBM is a leader in all these areas.

Business: Impelled by this new global arena and new technology model, business leaders expanded their horizons—driven both by competitive pressures and a remarkable array of new innovation capabilities. No longer content with cost savings from off-the-shelf technologies and solutions, they were seeking to innovate. And this involved not just their products and services, but their entire companies: business processes, management systems, policies and even their core business model. To accomplish that, they were looking to integrate advanced technology deep into their processes and operations. Our worldwide survey of CEOs has consistently confirmed this shift in businesses’ perceptions and priorities.

To deliver this kind of client value requires intimate knowledge of each client and the ability to make that knowledge operational on a daily basis—and that can’t be done from corporate headquarters. So we changed our own processes and organization to push decision-making and delegation closer to the marketplace.

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