Speeches

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

2008 IBM Annual Meeting of Stockholders
Charlotte, North Carolina
April 29, 2008

"Report to Shareholders"

2007 was a superb year for IBM. 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 revenue, profit, earnings per share and cash performance.

In terms of our long-term EPS objectives, which we described to you last year—that is, that IBM could generate $10 to $11 in earnings per share by 2010—we made strong progress on each element of our roadmap, growing 18 percent in 2007 and surpassing our objective of 14-16 percent.

And I trust you saw our results for the first quarter of 2008, which we announced two weeks ago. We continued to achieve solid performance—growing revenue by 11 percent... and earnings per share by 36 percent... while generating substantial cash.

There are many reasons for this performance, and for why we believe it is sustainable. Let me comment on two—our geographic reach and our ability to quickly adjust to changing client demand.

As you know, in many of the major markets today we see a changing economic environment. Yet clients are still willing to invest in information technology:

to cut costs to conserve capital to provide a faster payback on their investment... and to address urgent business needs like risk management, security and energy efficiency.

For example:

In the fourth quarter, our Global Technology Services team signed $300 million in "Green" services contracts and had more than 700 engagements. Demand is very strong because we have solutions that offer ROI now. These solutions combine things like data center design expertise, advanced systems technology, virtualization and new software to control energy use, utilization and provisioning. Clients are purchasing products to address the complex regulatory environment of today's business, such as Tivoli Security and Storage Management products. Tivoli software grew 9 percent in the first quarter, and our Storage Management software has generated 14 straight quarters of double-digit growth. IBM was among the first to see the opportunity for Service Oriented Architectures, or SOA, and we invested heavily. Today, IBM is the leader in SOA, which is a $160 billion global opportunity for IBM and our partners. We are helping thousands of clients re-tool their software infrastructure—reducing their costs and dramatically increasing their flexibility.

IBM also performed well because of our broad global presence. The first quarter saw continued robust growth in the world's emerging markets, as we focus on building out the infrastructures in these countries. For example:

We're helping Telecom Egypt construct a state-of-the-art data center with sophisticated energy-efficient green technologies, based on our mainframe platform. In Korea, we're working with a leading bank to build an infrastructure to develop and sell capital markets products, as they expand into investment banking. In Indonesia, we're part of a collaborative effort to deliver a microfinance solution for rural communities.

These are all examples of the build-out of public and private infrastructures to support three billion people moving into the middle class. In each of more than 50 countries—including Poland, Malaysia, Singapore, South Africa and Mexico—we grew revenues by more than 10 percent last year.

We recently formed a new "growth markets" organization, headquartered in Shanghai, to make the most of this opportunity. In the first quarter, revenue from the countries in the growth markets unit was up 11 percent at constant currency, and represented about 17 percent of IBM's revenue. We expect these trends to continue, and we expect these rapidly growing markets to continue to fuel IBM's revenue and profit engine in 2008 and beyond.

So we feel good about our start to 2008. In fact, we raised our EPS projection for the year by 25 cents. We now expect 2008 full year earnings per share of at least $8.50, which is 18 percent growth over 2007's reported results.

In an economic environment where many firms are struggling, we are demonstrating again your company's historic ability to balance an aggressive growth strategy with disciplined attention to productivity and cost. We are operating ambidextrously, as the times demand, and the results speak for themselves.

How did we position ourselves to achieve these results?

IBM is in a strong position today because of focused execution... and strategic choices that we made several years ago. I have discussed these choices with our investors many times over the years and detailed them in our most recent annual report. So I'll just recap them briefly.

Entering the decade, we saw major shifts that would change the economic and competitive landscape of our industry.

First, we saw an accelerating integration of global economies, and with it, the emergence of two important—in fact, historic—opportunities for IBM. We had a chance to capitalize on enormous populations of skills and expertise all over the world. And we could also capture rapid growth in dozens of countries as they heavily invested in information technology to modernize their societies.

Second, we saw the emergence of a new computing model. The PC model of the 1980s was receding in importance to clients. This new model would be built on a new global networked infrastructure—grounded in open standards and new technologies. So, as you know, we changed our business mix dramatically—getting out of commodity businesses like PCs and disk drives—and strengthening our hand in the technologies and skills that the new computing model would require.

Third, we anticipated that clients would place a premium on innovation and integration. Businesses and institutions wanted to take all this advanced technology far deeper into their organizations, to use technology to drive real transformation.

We changed our own processes and organization, in order to be able to deliver the actual value our clients sought. This meant, among other actions, pushing decision-making closer to the marketplace.

These were the three strategic choices we've made. They were far from obvious to many in our industry only a few years ago... but we made our decisions, and IBMers across the globe went to work.

As a result, today:

We are at the forefront of global integration. We have shifted to higher-value, more profitable segments of our industry. We have a clear strategic focus and value proposition for our clients—on enabling them to integrate and innovate.

Given all that is playing out in global economies today, some people are asking if we can continue to perform, if we can continue to produce profitable growth. I believe we can. Let me offer five reasons:

We have unmatched global reach & scale. IBM is diversified globally... operating in 170 countries, with 63 percent of our revenue coming from outside the U.S. in 2007.

We are the world's preeminent IT infrastructure provider... at the beginning of the most significant data center transformation in decades. One analyst firm projects that more than 70 percent of the Global 1000 will modify their data centers significantly in the next 5 years.

Why? They are running out of space and energy and need to better utilize the technology they've installed. And IBM is ideally poised to help. We are the historic leader in IT infrastructure, and this year we have the strongest lineup of new products and services for the data center in years.

Last month we launched our strategy for the New Enterprise Data Center, combining leading-edge capabilities in SOA, energy-saving "green" solutions, virtualization and new approaches such as "cloud" computing, on which we are partnering with Google.

We deliver unique client value. Even in uncertain economic times, one thing remains constant: Businesses invest in IT. IT saves them money, and it manages business-critical needs.

We are the business world's technology leader. 2007 was our 15th consecutive year of U.S. patent leadership. IBM is the undefeated champ of advanced information technology. And we have acquired more than 60 companies over the past 5 years to complement and scale our existing portfolio.

Finally, we are financially strong and flexible. Our focus on higher-value offerings helps drive profitable growth and strong cash generation. It has enabled IBM to return value to shareholders and to invest opportunistically for growth.

Let me underline this last point. We have the financial capacity to adjust to changes in near-term business conditions—with about 50 percent of our revenue from recurring streams—far less subject to volatility in uncertain economic conditions.

Our strong net cash from operations, with all pension funding and R&D costs fully baked in, has been very strong over the past five years and has grown substantially.

Allowed us to invest in the business—through strategic acquisitions and capital expenditures to drive growth. Generate substantial returns to investors through increased dividends—including the ten-cent... or 25 percent... increase I announced today—along with significant share repurchase. Of course, you know about our $19 billion of repurchases last year, and the $15 billion authorized in February.

In sum: We are well positioned to deliver on our 2010 game plan. For a clear and simple description of that position and how we got here, I recommend the handout "Generating Higher Value at IBM"... excerpted from my letter in our annual report... which you have received today.

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 a clear vision of the future... and disciplined execution by a team that's experienced in managing change. All this builds 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.