Speeches

Samuel J. Palmisano
IBM Chairman and Chief Executive Officer
Final Remarks, as prepared

2005 IBM Annual Meeting of Stockholders
Charleston, South Carolina
April 26, 2005

I will now provide a report on the company.

As you know, 2004 was a good year for IBM. We delivered record revenue of $96.3 billion and double-digit earnings-per-share growth. We gained share across our major businesses, generated strong cash flow, and we returned a record $8.3 billion to you, our shareholders, through dividends and share repurchases.

Importantly, we continued to make progress in transforming IBM for leadership in a rapidly changing information technology industry.

It was just three years ago -- in the midst of the downturn and soon after the dot-coms had imploded -- that we started talking about a major industry shift. We believed that powerful developments -- the arrival of a networked world, new advanced technologies, the adoption of open industry standards, and changes in client requirements -- were converging.

We believed that as this happened, client demand would shift. They would look to companies to help them combine leading technology with new kinds of business designs. And this would open up new opportunities for the industry, and for IBM.

We called this shift, this new industry era, "on demand business."

In year one, we articulated our point of view and mobilized the company. In year two, scores of clients were moving forward with on demand initiatives as we strengthened our product and services offerings. Now, in year three, we are gaining momentum in our client engagements. Clients are realizing measurable benefits in becoming on demand businesses, across a range of industries -- Renault Nissan in Japan, Bankinter in Spain, Nextel and eBay in the U.S., Metro Group in Germany, and hundreds more.

Our confidence in this industry shift to on demand business, and IBM's ability to capture this opportunity, grows every day.

Of course, even as we pursue these new growth markets, we must execute and deliver every day, as well. As you saw in our results a few weeks ago, we were not able to sustain the momentum of last year's record fourth quarter through the first quarter of 2005.

We had a good January and February. Then we had difficulty closing transactions in the last two weeks of the quarter, particularly in countries with soft economic conditions. These included Japan, Germany, France and Italy.

We are taking specific, targeted actions to get our business back on track.

First, we are addressing sales execution issues in our services, hardware and software businesses. We are putting a particular focus on smaller transactions and shorter-term services contracts, which are an increasing part of our revenue mix. We began the quarter with a strong pipeline in services. And just this morning, we announced extended engagements with NASCO and Pathmark. So we are off to an encouraging start. Second, we are continuing to shift investments from lower-growth to higher-growth areas of our business. And finally, we are, as I put it, "lowering the center of gravity" of IBM. This means restructuring parts of our operations to reduce bureaucracy and move more of our people and resources out into the field, closer to clients. These changes will enable us to execute and deliver value to our clients more effectively, while at the same time reducing our overhead.

Some of these actions were already in progress. We are accelerating them now, and will provide more details shortly.

There were, of course, a number of positive results from the first quarter.

We experienced strong demand for our mid-range systems. We had double-digit growth in business consulting in the Americas and in several of our key software brands. And our business in the high-growth markets of Brazil, China, India and Russia grew by 18 percent.

Perhaps most significant was the growth in Business Performance Transformation Services, or BPTS, which is IBM's primary strategy to capture the on demand business opportunity.

BPTS is a new market opportunity for IBM, and an entirely new market space for the IT industry. It encompasses the application of technology to transform our clients' business processes and, in some cases, operate those processes for them. Virtually every core process or operation has the potential for this kind of transformation -- from supply chain management and customer support, to finance and administration and human resources management.

In the first quarter of this year, our BPTS portfolio -- which includes both services and software offerings -- grew a combined 40 percent year to year.

Overall, first-quarter earnings per share were up 8 percent. A major factor affecting our EPS was a significant, year-to-year increase in pension expense. Without that, we grew earnings per share 20 percent in the quarter. And, as you know, we returned an additional $3.8 billion to our shareholders, and closed the quarter with $8.7 billion of cash on hand.

So while the first quarter brought to light the need for corrective action in certain parts of our business, it also demonstrated that:

The market shift to on demand business continues to progress. Our business model built on innovation is sound. And we are making good progress in the high-growth businesses that will drive IBM's long-term success.

I want to thank you for your continued support of our company during this period. None of us is happy about the recent decline in our stock price. But we believe that investors will respond positively as we do a better job of executing our strategy. It's ours to prove, and we will.

Your company has a history of identifying major industry shifts, placing big bets, and reaping the rewards of leadership. The company under Tom Watson, Jr. saw the dawn of electronic computing and made a big bet on the System 360 mainframe. More than 10 years ago, Lou Gerstner made another big bet -- to keep IBM together.

Today, it's the shift to on demand business. This opportunity draws on every element of the IBM portfolio -- services, software, systems and technology. You need the combination of all of this, brought together for each client, to truly give them competitive advantage today, to transform them into more flexible enterprises.

Let me give you an example of a business that drew on the broad capabilities of IBM.

We have a growing relationship with Norwich Union, one of the largest insurance providers in the U.K. The engagement began as a pilot for an innovative approach to automobile insurance called "pay as you drive." The idea was to enable Norwich Union to provide customized insurance policies based on a customer's actual driving record -- not on the actuarial tables.

The solution is built on IBM's telematics technology, which transmits data from the policyholder's car to the insurance company, via satellite. Norwich Union then uses IBM's advanced analytics software to adjust the driver's insurance rates based on real-time data.

The success of this new business model with Norwich Union's customers has led to a broader engagement. Under a multi-year agreement, IBM will reconfigure the company's IT architecture, manage its IT systems, and transform and operate a range of business processes, utilizing methodologies developed by IBM Research.

This is just one example of how on demand business engagements capitalize on the full scope of IBM software, systems, research, business process and global delivery capabilities. And it also illustrates, I think, why not every IT company will be able to participate in these spaces.

As we pursue our strategy, there will be bumps along the way -- there always are -- but we are convinced that value in our industry is moving to new places, and we are determined to
capitalize on this shift.

To do this, we have been making significant changes at IBM in recent years.

We have strengthened our capabilities by re-prioritizing our internal investments. We have developed and brought to market key technologies, such as WebSphere software and our POWER processor architecture, which is the foundation of our high-performance servers and storage systems -- and an expanding array of devices produced by our partners. We have also strengthened our hand through acquisitions. In just over three years, we have acquired 19 software companies. Last month, we announced our intent to acquire another -- Ascential Software, a leader in data integration -- and we expect that transaction to close soon. In services, we have strengthened our BPTS capabilities through acquisitions like Daksh eServices in India, Maersk Data in Denmark and Equitant in Ireland. In fact, earlier this morning, we announced the acquisition of Healthlink Incorporated, a Houston-based consulting services company with more than 450 highly skilled professionals. Healthlink is a leader in healthcare and clinical-based business processes and is well positioned in a healthcare IT industry that is growing at double digits. We are also making an important shift in our services business to capture the higher profit opportunities that come from creating reusable intellectual capital assets, to complement the traditional labor-intensive approach of the professional services industry.

While we have built up capability, we have also exited businesses that were of declining differentiating value to our clients and investors, including hard disk drives, displays and memory chips.

Probably the most noteworthy of these actions is our alliance with Lenovo, which will acquire our PC business. We expect this transaction to be completed soon. Through this partnership, we will continue to integrate PCs into our client solutions, along with the market-leading services and financing our clients have come to expect from IBM. This alliance also strengthens our position in China -- one of the world's largest IT markets, and the fastest-growing.

As we have transformed the company's business portfolio, we have continued to transform our global operations and our culture.

All of this represents a significant transformation of the company, one which is ongoing. This is why we decided to produce a companion document to our 2004 annual report -- "Understanding Our Company: An IBM Prospectus." You received both documents earlier this year.

There is a lot of information in the prospectus. But let me call out one section. It describes IBM's Values, which were re-examined by everyone in the company for the first time in nearly 100 years.

IBM's values express our heritage of innovation -- our commitment to re-invention, renewal and change in everything we do. Our values also express our deep-seated commitment to serving our clients, our colleagues, and our communities.

Nowhere was this more evident last year than in Southeast Asia. IBM pledged $3 million to relief efforts following the tsunami that struck that region in December. Individual IBMers by the thousands added personal contributions totaling more than $1 million to the American Red Cross and other organizations. Meanwhile, the IBM Crisis Response Team was on the ground with technology solutions to aid in the search for missing persons and help coordinate disaster recovery activity.

It is through examples like these, replicated year after year, in communities around the world, that the character of this company truly shines.

Two weeks ago, we announced another exciting initiative that demonstrates our values in action. It's called the Genographic Project. This is a five-year partnership between IBM and the National Geographic Society that promises to deepen our understanding of how the human race populated the planet.

This project will create one of the largest collections of human DNA ever assembled. We are collecting DNA samples from the last remaining indigenous populations on the planet. In addition, we're inviting the general public to take part by purchasing cheek swab kits and submitting their own DNA for analysis. Participants will receive customized genetic maps with details of the migratory paths followed by their own ancestors.

The Genographic Project will make a lasting contribution to our understanding of human civilization. This groundbreaking project, and others like it, truly demonstrates what we mean by our commitment to innovation that matters, for our company and for the world.

In closing, let me reiterate three points:

First, IBM is taking aggressive action that we believe will get our business back on track. Second, we remain committed to a business model grounded in innovation, and to a strategy that leverages IBM's unmatched capabilities and positions us for leadership in a rapidly changing IT industry. And finally, even as everything else in the world changes, IBM's values remain constant. It is our commitment to these fundamental values that will ensure our success and prosperity.

On behalf of all of our 320,000 IBM colleagues around the world, I thank you for your confidence and support of the IBM company.