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Technology Stocks : IBM

IBM 301.83

-1.3%

Dec 2 3:59 PM EST

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To: I. N. Vester who wrote (5603)	10/7/1999 1:10:00 PM
From: Arrow Hd.	Read Replies (1) of 8218

Just some general comments on the software business. The Y2K concern regarding software slowdowns was a topic we have discussed here since the end of last year so the fact that it is actually happening is no surprise. What is key is the difference between annuity revenue and period revenue. Most of the software companies do business on a one time charge basis with additional charges for version upgrades and to some degree for service support. That results in mostly period revenue so when data centers get frozen due to Y2K and the software business gets put on hold it creates a stall for those software companies relying on period revenue. Much of IBM's software portfolio is annuity revenue. IBM gets paid every month a monthly charge for the use of that software and if a customer upgrades their hardware, since the software is functionally priced, the software charge immediately goes up to the next level of charge. Maintenance charges follow a year later when the hardware upgrade's warranty expires. So all during the fourth quarter IBM will experience increases in it's annuity revenue stream as hardware capacity is increased and as warranty expires on last years upgrades maintenance charges go up too. This is a different model than most of the software business and is an IBM benefit. Further, since much of IBM's software business is based off of legacy systems, for instance OS/390, it is enormously profitable. You can add to that the fact that the CMOS mainframe lines have vertical upgrades that are implemented solely with microcode in a non-disruptive environment which would allow for a hardware upgrade within the data center freeze since it is concurrent with operations and you have a strategy that allows for hardware and software upgrades and both period and annuity revenue to get through the 4th quarter. That is not to say that IBM is completely immune to Y2K influences but without a doubt it is better situated to withstand any stall.

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