Chairman, President and Chief Executive Officer, IBM
April 30, 2013
Prepared opening remarks:
I will now provide a report on your company.
It is important to understand IBM's long term model. We are an innovation company. This means that we pursue continuous transformation. That is why IBM has been in existence for more than 100 years and why we will thrive for another century. We pursue this continuous-transformation model in six key ways.
First, we remix to higher value - in our portfolio, in our organic R&D investment, and through targeted acquisitions and divestitures. For example, two decades ago, 70 percent of our researchers were working in materials science and hardware. Today, 60 percent are in fields that support key growth areas, such as analytics and cloud computing. All the while, we have continued to lead the world in innovation - earning the most U.S. patents for 20 straight years, with a record 6,478 in 2012.
Our balanced approach to acquisitions has built a strong track record since 2000, with more than 140 acquisitions that complement our portfolio and strategy. At the same time, we have divested almost $15 billion of annual revenue over the past decade. If we had not done so, we would be a larger company today, but with lower margins and capabilities that are less valued by our clients.
Second, we make markets. We do so by category, such as new solutions like MobileFirst, Social Business and Smarter Commerce, and new systems categories, such as our PureSystems family. We also make markets by enabling a new generation of IT buyers, from Chief Marketing Officers to heads of Human Resources. And we make markets by geography - opening 144 new branches in emerging markets in 2012 alone. This is much more than setting up sales offices. It is about helping to build the economic, technological and societal infrastructure that will make entire regions competitive in the global economy - as we are now doing across sub-Saharan Africa, including the opening of our 12th IBM Research lab in Nairobi, Kenya.
Third, we reinvent core franchises. Our System z enterprise server, introduced in 2012, is just the latest reinvention of the mainframe, and it drove System z's largest capacity shipment ever during the fourth quarter. New workloads, including those on Linux, have crossed over to become the majority of work for the mainframe. Another example is in software, where core software platforms like WebSphere have been entirely transformed.
Fourth, we remix our skills and expertise. Over the past three years we have increased our skill base in analytics by more than 8,100 experts. We have also added nearly 9,500 experts in high-growth industry areas - such as healthcare, energy and banking.
Fifth, we reinvent the enterprise itself. In addition to continually enhancing our productivity, we are taking the next step toward becoming a Smarter Enterprise. This includes the application of analytics to every part of our business. It also means using social technologies to change how our employees work, learn and collaborate.
Sixth, we use our strong cash flow strategically. It fuels reinvestment in the business and consistently strong returns to you, our owners.
In 2012, this model produced solid results. Your company continued to outperform our industry and the market at large. We achieved record profit, record free cash flow and record earnings per share. This marked 10 straight years of double-digit earnings-per-share growth. While our revenues of $104.5 billion were flat at constant currency, IBM's operating pre-tax income margin rose for the tenth consecutive year - to 22.2 percent, up 12 points since 2000.
As I mentioned, our strong cash flow enables us to invest in the future and return high value to you.
- In 2012 we invested $3.7 billion for 11 acquisitions in key areas of software and services and $4.3 billion in net capital expenditures. We spent $6.3 billion on R&D.
- We were able to return $15.8 billion to you - $12 billion through share repurchases and $3.8 billion through dividends. Last year's dividend increase was 13 percent, marking the 17th year in a row in which we have raised our dividend, and the 97th consecutive year in which we have paid one.
- And, as I announced earlier, we have extended those streaks by increasing the dividend again, by 12 percent.
While we were not satisfied with some aspects of our results for the first quarter of 2013, we continued to make progress on our Road Map objectives - growing EPS by 8 percent, and returning $3.5 billion to you. Of our $70 billion goal for returns to investors through dividends and share repurchases over the five years of our 2015 Road Map, we have already returned almost $40 billion to you.
To sustain a long-term innovation model in our industry, a company must do more than accommodate major technology shifts. It must lead them. IBM has done this repeatedly over the past century - not only pioneering new technology models, but capturing the significant economic value they create.
Today, another new wave is sweeping in - powered by analytics, mobile, social and cloud technologies, and the so-called "Big Data" they generate. This represents a major shift in information technology - from the back office to the front office, into the core activities of businesses, institution and societies.
We anticipated this shift with Smarter Planet, describing a world that was becoming instrumented, interconnected and intelligent. In the five years since its launch, the goal of building a Smarter Planet has had a transformational impact both in the marketplace and inside IBM. It has engaged leaders around the world in reimagining their systems of retail, supply chain, healthcare, energy, telecommunications, transportation, food, water, public safety and more.
For IBM itself, Smarter Planet is not only driving growth, but also speaking to IBMers' aspiration to be essential to each of our vital constituencies. This is our purpose as an enterprise - to be essential to our investors, our clients, our communities and our partners in realizing their most ambitious hopes.
Being essential takes many forms.
- It means investing, through good times and bad, in the kind of fundamental research that produces new capabilities for business, society and individuals. Capabilities such as Watson, our pioneering cognitive computer that isn't programmed, it learns.
- It means applying those breakthroughs to the world's most important work. For instance, since its debut on Jeopardy!, Watson has gone to medical school. It is learning from leading universities, hospitals and healthcare providers, such as Columbia University, Wellpoint Insurance and Memorial Sloan-Kettering Cancer Center: how to transform patient treatment... how to help healthcare professionals become more productive... how to make better diagnostic decisions about cancer and other highly complex diseases.
- Being essential also means helping our clients transform not just their operations, but their roles - reimagining what it means to be a police chief, a doctor, a marketer, a mayor.
- Being essential means reinventing not just how computers learn, but how children are educated - as we are doing at our pioneering Pathways in Technology Early College High School, or P-TECH, in Brooklyn, N.Y. Cited by President Barack Obama in his 2013 State of the Union address, this radical new educational model for grades 9-14 is being replicated by states across the U.S.
- Finally, being essential means engaging with the world in new, more direct and human ways.
- One example is IBM's Corporate Service Corps, which is modeled on the Peace Corps and is marking its fifth anniversary this year. Each year, hundreds of our best and brightest employees collaborate with community leaders, government officials and NGOs in emerging markets around the world. More than 2,200 IBMers have deployed on more than 750 team assignments - on health care for poor women and children in Nigeria; clean water and food safety in Vietnam; and economic development in Ghana and Turkey - among many others.
- Another example is our Smarter Cities Challenge, launched in 2010 to help 100 cities address some of their most critical challenges. Right now we're in the most active period in the program's history, as we send teams to 15 cities in 12 weeks - from Porto Allegre, Brazil, to Fresno, California.
The impact on communities of these initiatives has been extraordinary - and the impact on IBMers has been just as powerful. Many describe it as the most meaningful experience of their careers.
In closing, let me express my deep pride in the worldwide IBM team for bringing us to where we are, and my gratitude to you, our shareholders, for your unwavering support. I hope you share our excitement about your company's continuous transformation and the way in which IBMers are building a brighter future for our clients and a smarter planet for us all.
Information about non-GAAP financial measures in report on company
This report includes selected references to certain non-GAAP financial measures that are made to facilitate a comparative view of the company's ongoing operational performance. For information about the company's financial results related to operating pre-tax income margin and operating earnings per share, which are in each case non-GAAP measures, see the company's Forms 8-K dated January 22, 2013 and February 28, 2013. (Attachment ??-Non-GAAP Supplementary Material).