Samuel J. Palmisano
IBM Chairman and Chief Executive Officer
Final Remarks, as prepared
2007 IBM Annual Meeting of Stockholders
Knoxville, Tennessee
April 24, 2007
I will now provide a report on your company.
2006 was a great year for IBM in many respects. It is a pleasure to report to you that IBMers around the world turned in a strong performance, which you saw in our results.
We achieved record profit, record earnings per share and record cash performance. Our margins are the highest in the past ten years. Diluted EPS has seen 17 straight quarters of growth. And cash generated from every dollar of revenue has increased 18 percent since 2003.
I trust you saw our results for the first quarter of 2007, which we announced last week. We continued to grow revenue, profit, earnings and generate substantial cash. While we saw some weaknesses in the U.S. market, these were more than offset by strong performances in Asia, Europe, Canada and Latin America—a demonstration of the advantages of our global business model and the investments we made around the world.
At many companies, the CEO would now proceed to share with you highlights from each division, each major product and service, each geography. If that company were grounded in research and technology, he or she would doubtless talk to you about how many discoveries emerged from its labs, and how many patents the company earned.
Obviously, I could do that. I could tell you about our unmatched worldwide capacity for innovation that matters, reflected only in part by our 14th straight year of earning more U.S. patents than any other company in the world, and most of our major competitors combined.
I could do that, but I won't. Because I want to use my time with you today looking not just at what happened in 2006, but at the longer-term patterns and decisions that made it possible. Because last year was the result of strategic choices—some of them hard choices—that we made entering the decade.
Several years ago, we saw major changes coming that promised to disrupt most of the basic assumptions of our industry. These changes were being driven by three forces:
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These forces were causing value, opportunity and profit to shift across industry after industry—and none more than information technology. Let me spend a moment on each.
First, how was computing changing?
Of course, the Internet was interconnecting everything—people, businesses and institutions, and also a proliferation of connected technology in devices, in transportation systems, retail... in the infrastructure that underpins how we all live and work.
We anticipated the mass adoption of open standards, new approaches to software and advanced technologies such as virtualization and modular hardware systems. Together, these would create a very different computing capability for businesses. It would radically change the data center, and the work loads and work flows that it would support. We committed to lead these changes.
Second, how were client requirements changing?
Businesses and institutions of all kinds were now seeking to take all this advanced technology far deeper into their organizations. They wanted to integrate it into their processes and operations. Their aim? Not merely to reduce costs, but to use technology to be more innovative - in their products and services, of course, but also in their business processes and even their business models. This would be a major shift in how IT would be applied by our clients, and would present an opportunity for IBM to help them create significant competitive advantage - to be "the innovators' innovator."
Third, what would the reality of globalization mean for our clients, IBM and our industry?
We saw the emergence of an entirely new business environment, one that would allow businesses, including our own, to tap into skills, expertise and economics now accessible all over the world. We saw the sunsetting of the "multinational"—with its replication of mini-versions of the parent company in country after country—and the arrival of the globally integrated enterprise. For your company, this would allow us to drive enormous productivity and open up vast new growth markets.
We saw all this taking shape. And we decided to take advantage of these changes and to lead these shifts.
We got to work.
You know what followed. We exited commoditizing businesses like PCs, hard disk drives and displays—the elements of the past computing model—and strengthened our capability in the emerging model. This is why we are growing robustly in software and in particular in Service Oriented Architecture, or SOA... information on demand... and open, modular systems for businesses of all sizes. We deepened our business consulting capability.
We have acquired 56 companies since I became chairman. These have strengthened our hand in the key growth and profit areas, mostly in software, but also in new spaces that combine software and services.
Acquisitions allow us to efficiently capture the smarts and insights of entrepreneurs and venture capitalists, and integrate them with our global distribution and innovation capabilities. It's a little known fact, but IBM has developed a core competency in acquiring and integrating companies. We understand how to integrate technologies, operations, cultures and people, and then scale them by leveraging our global sales and distribution system—a unique advantage of your company.
To put all this change very simply, IBM's business mix has been shifted to higher-value spaces—with 40 percent of our pretax income now coming from software, 37 percent from services and 23 percent from systems and financing. We like this mix. It is better balanced, and favors profitable growth opportunities.
At the same time, we began a multi-year journey to become a globally integrated enterprise ourselves.
We're building and integrating truly global operations and processes, concentrating work and functions in the right places around the world, based not only on cost savings, but even more importantly on access to expertise and open business environments. This is why, even as we grow our presence in places like India, China, Russia and Brazil, we have major employee populations—and continue to hire advanced skills—in the U.S., Western Europe and Japan.
Today, we operate in 170 countries, and about 60 percent of our revenues come from outside the U.S. Over the next four years, we expect the IT markets in China, Brazil, India and Russia alone to grow revenue more than twice as fast as the worldwide economy as a whole, which should produce a market opportunity of more than $150 billion by 2010. IBM is extremely well positioned in these markets.
The combination of all these moves—remixing our businesses and integrating globally—has turned IBM into a very different company than it was just a few years ago.
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Today we have greater financial flexibility to invest in our future and return value to you. We continue to:
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Let me say a word about our stock price, which I know is of keen interest to our owners. There are many ways of looking at IBM's market value over time.
As we stand here today, looking back five years, the stock price is about flat. On a ten-year view, the stock has appreciated over 160 percent and has outperformed the S&P 500.
I also think it's helpful to look at the effect on our market value of the significant changes I described earlier. In the seven quarters since we fully divested ourselves of our PC business, a period during which we acquired 19 software companies: our stock price has gone from 75 to where it is today. Our gross profit margin has increased from 36 percent prior to the divestiture to 40.2 percent today; our pretax income margin has increased from 8.8 percent to 11.7 percent; and in the past two years, we have also doubled our quarterly dividend.
Of course, no one is satisfied with where our stock is today. I do believe the reshaping of our company and the strategies I've described—coupled with relentless day-to-day execution—are the best way to grow long-term market value, and to capture the lion’s share of the enormous opportunity before us.
As we stand poised before a profoundly new era of technology, business and society, I strongly believe that there is no other company that is as well positioned for leadership, in all the ways that a business can lead.
That belief is grounded not in any particular products, services, assets or resources. Those come and go. What produces profitable growth, superior return on invested capital and strong cash flow is disciplined execution by a team committed to building long-term value.
In the end, the success of a company like IBM depends on the persistence and vision of its owners. I and my colleagues are deeply grateful for your support, your continual input and ideas, and your shared commitment to the core values of this unique enterprise.
Thank you.
