Sam Palmisano
IBM's Annual Stockholders Meeting
Kansas City, Missouri
April 29, 2003
Let me begin my report on the company by saying that IBM today is strong, and we are gaining momentum in a highly dynamic industry.
I want to talk to you about your company's performance in 2002. But I will be emphasizing how the actions we took, and the results we delivered last year, fit into a broader leadership strategy that is part of a fundamental shift in the information technology industry.
I want to share with you why we believe we stand our best chance in decades of returning IBM to a position of leadership — leadership in our industry and leadership in the broader world of business.
I'll discuss this in more detail shortly.
When I spoke to shareholders last year in Louisville, I said that we were optimistic about IBM's future, for 2002 and beyond, despite near-term challenges and uncertainties. Looking back, 2002 was more momentous than could have been predicted.
We had to deal with a continuing tough economic climate, particularly for the information technology industry — which contracted for the second straight year in a row.
For IBM, 2002 was a very important year.
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As you know ...
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However, despite the downturn, last year all of our core businesses gained market share.
This is important. Share gains mean we will emerge from the current economic slump in an even stronger position, relative to our competitors.
Throughout the course of 2002, IBM also made bold moves to fuel future growth.
Our continued strong cash flow gave us the flexibility to make appropriate investments in our future. As you read in our Annual Report:
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We took advantage of attractive valuation levels and acquired several companies, including PricewaterhouseCoopers Consulting and six strategic software companies.
In February this year, we completed our acquisition of Rational, a leader in software development tools, for $2.1 billion.
And we also improved our productivity and our competitiveness.
We revamped our PC and microelectronics businesses, and both our Personal Systems and Technology segments returned to profitability by the fourth quarter.
Our inventory levels now stand at a 20 year low.
By transforming and streamlining our integrated supply chain, we took $5.6 billion in costs out of the business. We're planning to take another $5 billion out in 2003.
One of the most important investments we made in 2002 was to fully fund our U.S. pension plan, contributing a combination of cash and IBM stock valued at just under $4 billion.
The U.S. plan represents more than two-thirds of our total pension commitment. We have contributed a half billion dollars to non-U.S. plans in recent years, and plan to continue to fund them over time.
The decline in equity markets has caused pension gaps for companies of all shapes and sizes, and those companies that have pensions will be dealing with this issue for several years to come. Given the strength of our cash flow and our balance sheet, we decided to put the largest part of this pension "gap" behind us for now.
And ... after all these investments, we had sufficient cash to return to shareholders directly — $1 billion in dividend payments — and indirectly — $4.2 billion in repurchased IBM common stock.
We continued to lead the world in technical innovation, which you will be hearing more about from Nick shortly.
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On a hot summer's day, New York's Governor Pataki joined us in East Fishkill to open the most advanced semiconductor development and manufacturing facility in the world. This $3 billion state-of-the-art computer chip plant is our largest capital investment ever. It's an amazing facility. It will enable us to continue to lead the way in the next generation of advanced microprocessor technology — and several generations beyond that.
Let me now say a few words about our stock performance.
While our stock was down year-to-year — no one is happy about that — it held up better than all of our major competitors.
IBM shares were down in line with the S&P 500, and importantly for the past several months, we've traded at a premium to the S&P 500. This reflects the value of our business model as well as how we've executed.
When you add it all up, in 2002, IBM turned in a solid performance in an incredibly challenging year — thanks to the dedication and hard work of my 320,000 IBM colleagues.
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In the first quarter of this year, we built on the momentum we generated in the second half of 2002. In the face of a continuing challenging economic environment, we completed our most solid and balanced first quarter in several years.
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Most encouraging, our on demand strategy is gaining traction with customers.
I want to talk about our on demand strategy in more detail, because it is far more than the latest IBM marketing campaign or product strategy. It describes where we believe the entire information technology industry is headed.
There has been speculation in recent times about the IT industry and its future. Some have wondered if its best days are over. Some have speculated that a trillion-dollar industry simply can't keep growing.
Let me reassure you: this industry remains attractive, important — and it will remain a growth industry. In fact, we believe that, long term, it will continue to grow faster than GDP.
However, it's important for all of us to understand that future growth will not be stimulated by technology alone. This is a historic shift for an industry that has always been fueled by a constant stream of new technologies, products and gizmos.
But growth will not be fueled that way in the future.
Why? Three reasons.
One: IT is a $1.3 trillion dollar industry. It's wishful thinking that a single technology will drive growth for the whole industry. IT has gotten too big and too interwoven into the fabric of business for that to happen.
Two: although technical innovation is and will always be a driving force of this company and the IT industry, customers don't value technology for technology's sake. They value the application of technology to solve serious business problems.
Three: customers no longer think about computing as a collection of piece parts. Today, computing is viewed holistically: as a technical architecture, an end-to-end system, a computing model.
The computing model doesn't change very often. But it's changing now.
In the past, customers used technology to automate stand-alone operations like payroll and inventory control — the back-office. Or procurement, manufacturing, the Web-based store.
Customers have derived great benefits from applying technology to those business processes.
But today, customers want to use technology to pull those stand-alone operations into a unified whole to boost productivity and deliver tangible returns.
They want to leverage network technology to help them build a business that can respond dynamically to whatever the world throws at them.
And they know that they can't build such a company on top of stand-alone computing systems and piece-part technologies.
That's why we believe we're on the cusp of a fundamental change in computing. In other words, trends in technology and the application of technology to the needs of business are coming together in a new era we call "e-business on demand."
The promise of on demand is that a company or institution can provide products, services, information, health care, education, government services and so on — all "on demand" for their customers, citizens, patients and students.
These "sense-and-respond" or "real- time" enterprises enjoy enormous competitive advantages.
They are able to:
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As you can appreciate, this is very appealing, especially in these uncertain times.
But ... stop and think about the magnitude of business transformation that is required for a company or institution to become "on demand."
It requires nothing short of flipping businesses on their side — moving from a collection of units and silos to a seamlessly integrated, horizontal flow across value chains — from the customer to the supply chain. This is all about organization-wide integration to drive productivity.
To pull it off, customers must optimize businesses processes and pull those processes together into an integrated system. In short, they must re-imagine business design.
And not because some "new economy" guru tells them to. This isn't the late '90s!
Today, it's their own customers' escalating demands and the changing dynamics of their own industries and global economics that are pressuring all businesses to become much more responsive.
That's where IBM comes in.
Our customers are turning to us as that IT partner that can provide them with the business insight and process expertise they need.
Indeed, this is why we acquired PricewaterhouseCoopers Consulting last year: to build up a critical mass of insight and expertise to help customers become on demand enterprises.
Customers like Finnair turned to IBM for help in flipping its processes — from ticketing to check-in — on their side. Finnair's digitized, integrated value chain makes the airline more competitive, more cost efficient, and more able to meet the needs of customers, on demand.
Butterfly.net came to IBM for assistance in a first-of-a-kind business model for the online video-game industry, a model that uses a commercial server grid to access computing power on demand.
And just around the corner from here, Kansas City Southern Railway relied on IBM Business Consulting Services to help integrate stand-alone processes, streamline operations and improve productivity.
Kansas City Southern is now using wireless technology to track cargo as it moves through a rail network reaching from Canada to Mexico ... and it's providing shipment tracking services to its customers, on demand.
These and many other customers are turning to IBM because IBM offers more intellectual capital than any other company in the IT industry to help them transform into on demand enterprises.
Many of today's IT companies have based their strategies on dominating a single product or category — they are what we call pure plays. Many of them made a lot of money in the 90s selling computing this way. And then many of them stopped making money — for themselves and their investors.
Most of these companies are sticking to their pure play strategies. They are still looking for, hoping for, the next breakout innovation — the next operating system, product feature, the new killer application that will bring back the days of hyper growth.
Do not be confused. Their problems do not stem from the current economic environment alone. Their real problem is that they are looking backward, not forward. They are not ready to serve customers who today demand this combination — this fusion — of deep business insight and advanced technology.
As a company, we've declared that we will lead in the on demand era. And we have also understood that leadership in this new era requires a different kind of company.
That's why we have been aggressively reinventing our company and making moves to position IBM for leadership in the "new" IT industry.
All told, we're investing $10 billion in this strategy — to invent and develop the necessary technologies, products and services, and to take our message to customers. The TV ads you saw at the beginning of our meeting are part of a new advertising campaign for on demand.
We're mobilizing the entire company, as well as our industry allies and partners, around making on demand a reality. That work comes down to three major planks:
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Importantly, we have committed that IBM will be the world's premier on demand business, because those companies who move first will have enormous competitive advantages over those who are slow to adapt. And we want those advantages to accrue to IBM ahead of our competitors.
In summary, the technology sector has always made a significant contribution to world economic growth.
It is now entering a new, critical phase. It's all about new business designs that will yield productivity for our customers — and a new computing model based on open, integrated technologies. This is what e-business on demand is all about.
IBM is committed to leading this shift and to building on our momentum.
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We're committed to continually adapting, creating and leading in the high value segments — because that's the only way to deliver consistent, long-term earnings growth in an industry that is constantly evolving.
And, importantly, we're gaining share and outperforming our competitors.
We also believe that investors reward companies that manage for the long haul, run highly efficient operations and are managed by experienced and disciplined leaders. IBM is that company.
With this context, let me close with a brief discussion on IBM's financial model. As I mentioned previously, the IT industry is attractive. It enables productivity improvements and economic growth.
I already mentioned the fact that in this new world of on demand — customers are placing less value on piece-part technologies and greater value on business insight and process expertise.
Profits, growth and return on investment are following suit.
Based upon industry estimates:
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We're committed to continually adapting our portfolio — because creating and leading in the high value segments is the only way to deliver consistent, long-term earnings growth in an industry that is constantly evolving.
That's why we acquired PricewaterhouseCoopers Consulting and six strategy software firms.
That's why we divested our hard disk drive business.
That's why we've invested $25 billion in R-and-D and $25 billion in capital since 1998.
These actions were designed to better position IBM to capture profit in the fast-growing, high-value segments of the IT market.
As you saw earlier, it's a strategy that's paying off:
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It's a financial model — backed by a strong portfolio of products and services — that positions us to offer our customers the business insight and process expertise they need ... and importantly, it allows us to deliver what our shareholders rightly expect of us: namely strong, profitable growth, cash and earnings.
I'd now like to introduce you to a colleague who is instrumental in executing our on demand strategy.
Nick Donofrio — our senior vice president for corporate technology and manufacturing — who leads our technology, research and manufacturing operations, as well as our drive to transform IBM into the premier on demand business.
I've asked him to share with you some of the exciting and important innovations IBM and IBMers are working on to make on demand business a reality for our customers.
Nick Donofrio: Thank you, Sam ... and good morning ladies and gentlemen. I am honored for the opportunity to share some of the excitement we are feeling about the future of our company — excitement fueled by technology innovation.
You saw some of the great things we are working on as you entered the meeting today, but I would like to take you further into our labs and talk about some of the innovations we just could not bring along with us! Some that were either too big ... or too small ... and some still very much on the drawing boards in our laboratories.
Imagine, if you will, a world of computing without computers as we know them. An on demand world in which business and personal transactions are handled fast, efficiently and securely through something as simple as a gesture, a word, a thought ... even a mood.
Imagine computing woven into the fabric of our lives ... into our clothing, our furniture, in everyday devices.
Imagine computing that is always on, always connected, that never goes down ... that fixes glitches before they happen ... that automatically downloads the latest upgrades, so you don't have to.
Imagine those super-reliable, intuitive systems in our cars ... inside the appliances in our homes ... in the machines we all depend on — ensuring problems are either identified early or do not happen at all.
Those kind of advancements would have been science fiction a few years ago. But to the people in IBM's research and development labs around the world, they are very real. In fact, we are seeing some of them right now.
I am honored to represent those people today ... the brilliant, innovative technical people of IBM — 177,000 of them in total — who help our sales and services teams integrate technology into business solutions for our customers ... our manufacturing and logistics teams ... and, of course, our researchers, scientists, engineers and developers. All of them give our company its pulse. And you can be assured that this pool of talent includes some of the greatest technical minds in the world.
They are people who have earned the Nobel Prize ... membership to the U.S. Academies of Science and Engineering ... who have won the National Medal of Technology ... the National Medal of Science ... the prestigious Japan Prize ... induction into England's Royal Academy of Engineering ... and into America's National Inventors Hall of Fame — alongside legends such as Thomas Edison, Louis Pasteur and Henry Ford. They have done all of this and much more.
And we are not resting on our laurels. 2002 marked the 10th consecutive year IBM led the world in patents. In fact, over the past decade, our company has generated more patents than our top 10 competitors combined.
You heard Sam talk about e-business on demand — a strategy that will play out over many years. The IBM technical community is creating the technology solutions to drive it. For example:
Last summer, in East Fishkill, New York, we opened the world's most advanced semiconductor facility where we develop and manufacture state-of-the-art chips on 300mm wafers. These wafers — a foot in diameter — contain up to 50 billion transistors each. And the plant is a perfect example of an on demand facility. It exemplifies "touchless" manufacturing that senses and responds to changes in chip configurations and orders — all through systems automation. Customers can track their chip orders through the manufacturing process electronically in real time ... and suppliers can access the plant's operation remotely, to diagnose any potential problems and make repairs immediately.
The chips we produce here show up in cell phones, video games, a vast range of internet access devices, even Apple computers! This PowerPC processor — I know you can't see it — I can barely see it — contains more than 5 million transistors and nearly a mile of copper wiring — all on a piece of silicon smaller than a fingernail.
But we don't build these chips just to power cell phones and games. We manufacture them for use in the world's most advanced computing and storage systems for our customers. As we speak, IBM researchers are creating new types of systems whose processing power will exceed the combined power of today's 500 fastest supercomputers ... systems that can process previously unfathomable amounts of data and numbers of calculations.
One of these systems — we call it Blue Gene — will enable scientists to understand how genes and proteins behave inside the human body, speeding the diagnosis of diseases and the development of new drugs to treat them.
In fact, just nine days ago, IBM technology played a leadership role in helping scientists in Canada achieve a breakthrough in the race to stop the spread of the deadly SARS virus. A cluster of our powerful xSeries servers enabled scientists to complete the world's first genetic sequence of the "corona-virus" believed to be responsible for SARS. This milestone could open the door to a diagnostic test for the virus, it could help with the development of anti-viral medications to treat it, and hopefully lead to a vaccine.
As we strive to help the medical profession understand the human body, our technical teams are simultaneously drawing inspiration from it.
Already, we are producing technologies for a new class of machines that can detect problems on their own — that regulate, heal and manage themselves, much like our own autonomic nervous system that manages things like our heartbeat, perspiration and breathing.
These autonomic systems will be linked to massive grids that will, in effect, turn the Internet into a giant supercomputer shared by people all over the world. Joined by a range of partners, we are applying the power of Grid Computing to some very important initiatives, particularly in the field of science and medicine.
One partnership is with Oxford University and the UK government to build a Grid enabling the early screening and diagnosis of breast cancer ... and give medical professionals around the world more information to treat the disease.
That's the big stuff. But we also sweat the small stuff.
Can you believe that the base-level technologies that have fueled the explosive growth of this great industry are a million times more advanced than they were when I started at IBM 36 years ago?
While that's true, many of those core technologies will eventually reach their physical limits. For example, the properties of silicon — the core material used to manufacture semiconductor chips — will eventually prevent our industry from making transistors any smaller. Yet, they simply must get smaller.
Our scientists believe that carbon nanotubes just may be the answer. Not only have our researchers discovered that transistors made from carbon nanotubes are more than twice as fast as conventional silicon transistors, they also know they will get even faster. This technology is 50,000 times thinner than a human hair ... five times the strength of steel ... and just 10 atoms across. Who knows what other benefits we will discover from this technology! We already know that in addition to faster processing speeds, they will help us produce chips that consume far less energy than today.
And what happens when conventional methods of storing information — like magnetic media — reach their density limits? Our researchers have demonstrated an innovative nanotechnology that can store a trillion bits per square inch — 20 times greater than the most dense disk-drive technology available today, which might one day store the equivalent of 25 million printed textbook pages on a surface the size of a postage stamp.
This new technology is called "Millipede" because it uses thousands of microscopic legs to punch individual "bits" — the ones and zeros of information processing — into a thin plastic film.
For me, this is like "back to the future," when you consider that the very earliest computer input device was the punched card. So, when it comes to information technology, you never throw a good idea away! What's old can often become new again!
Advancements like these can transform entire industries, underscoring why we invest so heavily — and wisely — in research and development.
And something else has changed over the decades since I joined IBM. Technology — R&D — is no longer just about the physical and materials sciences. It is no longer just chips and devices. It is driving the software industry and our services businesses in ways we never before imagined. It is everywhere ... and in every thing.
Here's something neat — our Almaden Research lab in California has developed a unique on demand service called WebFountain, which sits squarely at the intersection of technology innovation and business transformation.
With privacy and security concerns of paramount importance, WebFountain crawls through computer networks to collect, analyze and store massive amounts of text, and then it discovers patterns, trends and relationships that otherwise would never have been detected. Every few weeks or so, we literally capture the entirety of the Internet on our servers so we can study it!
The business implications for this technology are endless — in optimizing marketing resources, in gaining whole new insights, in creating new kinds of applications and services.
And do you realize that the car you drive is itself a powerful computer? For years now, automakers have been using computer technology to increase engine efficiency, cut pollution and regulate fuel consumption. In fact, some car models already have more computer chips in them than the Mars probe had!
Today, we are working with auto manufacturers — including Daimler-Chrysler, Honda and Hyundai — to revolutionize networked navigation systems and driver services. We are even exploring the ways cars are serviced and made safer for you to drive. Using wireless technologies and the Internet, we hope to one day help manufacturers monitor your car's performance remotely and transmit upgrades and fixes on the fly.
I think it is clear that our researchers and scientists ... engineers and developers around the world have a huge array of materials, ideas and options in front of them to fuel invention and innovation to keep IBM at the forefront of leadership.
What occupies us now is harnessing the power and potential of information technology so our customers leverage the on demand computing environment.
Never before in IBM's history have we been more ready for this challenge.
Never before have we been more focused and prepared to extend our leadership position in this industry.
The fascination with technology for technology's sake is long gone. Now, the new world issue is: "How do you adapt technology to solve business problems faster?"
On behalf of those 177,000 IBM technologists around the world, let me tell you that we are excited about that challenge.
We are engaged. We are pumped. We are filling Sam's e-mail with great ideas on how to make this on demand future a reality!
We will do it. That's what IBM is all about.
And I thank you for listening.
Thank you.
I hope you got a sense today that IBM is a company committed to excellence ... committed to leadership ... committed to reinventing ourselves over and over again — as we have always done — to making our products and services exceedingly valuable to our customers.
And above all, committed to making our employees and our shareholders exceedingly proud of the way we operate around the world, and in our communities.
I also hope you have a better sense that IBM has built a culture of innovation through our ability to apply invention in new ways ... and to execute on our futuristic thinking.
We are proud of our ability to adapt and transform through constant change, all while maintaining our high ethical standards ... our commitment to health, safety and the environment ... and in treating people with fairness and respect.
Sam Palmisano: Thank you Nick.
As you just saw, IBM has had a rich heritage and impressive record of reinventing ourselves.
Today the worlds of technology and business are once again undergoing fundamental change.
And — once again — your company is looking to the future. We're stepping forward and demonstrating all that is unique about IBM — by providing insight, solutions and leadership — for all our customers and our industry in this new era of on demand.
We understand the challenges and the responsibilities. And your company is ready to step up and deliver. Thank you.
