NW,
I think the internet/networking is one of the main drivers in creating a larger demand for services. I posted a detailed response to Harry Lansiedel some time ago concerning services at IBM. I'll see if I can find the post later. I'm looking at the IBM annual report right now though, and it's clear that for them, the growth is in services (looks like the only growth!! <ggg>). Kind of ironic, the 'mainframe company' is getting less and less revenue as a percentage of total business from hardware...
IBM percentage of revenues by category (from 1997 annual report)
1997 1996 1995
Hardware sales 46.1% 47.8% 49.5%
Services 24.6% 20.9% 17.7%
Software 16.4% 17.2% 17.6%
Maintenance 8.1% 9.2% 10.3%
Rentals and Finance 4.8% 4.9% 4.9%
Revenue by category (in millions)
1997 1996 1995
Hardware 36,229 36,316 35,600
Services 19,302 15,873 12,714
Software 12,844 13,052 12,657
Maintenance 6,402 6,981 7,409
Rentals and Finance 3,731 3,725 3,560
The kicker for IBM is that their gross profit margin has been going down because of services. It was 39% in 1997, down from 42.2% in 1995. This should not affect CPQ though, because IBM's margins on S/390 are much higher than what CPQ gets for it's PC gear. Rudedog did a post some time ago that I believe said service margins are somewhere in the mid 20% range... If you look at the figures, services is now IBM's second largest revenue category. Gerstner is also on record (month or two ago) stating that IBM should be able to show 'double digit' growth in services over the next few years. This bodes well for CPQ, assuming they integrate DEC smoothly and NT continues it roll...
John
PS - Here's an article from today's news.com that also addresses this top partially. It states IBM's services revenue is heading toward 1/3 of total revenue...
Click here for Ascend Communications.
IBM profit to show tepid
growth
By Reuters
Special to CNET NEWS.COM
July 20, 1998, 5:15 a.m. PT
NEW YORK--IBM is expected to show tepid
year-to-year growth in its second-quarter results
amid the economic slowdown in Asia, sales
declines at its troubled personal computer business,
and a transition for its mainframe business.
Offsetting these risks will
be growth in IBM's
fast-paced services
business--revenues are
nearly a third of IBM's
total and rising faster
than 20 percent a
year--along with solid
gains in software, data-storage, and midrange
computer systems.
The world's largest computer maker plans to report
second-quarter results after the close of regular
trading today.
Wall Street is looking for the company to report
earnings in the vicinity of $1.49 per share, up only
slightly from the $1.43 per share in the June quarter
of 1997, according to First Call, a service which
compiles brokerage estimates.
IBM has in recent quarters managed to report
earnings that were a penny or two per share ahead
of the consensus forecast in each period--satisfying
Wall Street's demand that high-technology
companies err on the upside of such projections.
SoundView Financial analyst Gary Helmig said
IBM's results should once again showcase the
computer maker's capacity to overcome weakness
in some businesses with strength in others, thanks
to its diverse mix of computer hardware, software,
and the services required to install and maintain
such systems.
"What you have with IBM is the ability to make up
with the apples what it lost on the pears," said
Helmig, whose estimate of $1.54 a share for the
second quarter makes him the most bullish Wall
Street analyst on the quarter's expected outcome.
While quarterly revenues are expected to
comfortably exceed $19 billion, most analysts
believe the company's trouble spots reduce the
chance of an unexpected surge in sales, thus
affording little room for a positive earnings surprise.
Many believe second-quarter results will be cut
about 4 percent by the continued boom of the U.S.
dollar vs. other currencies, which hurts the results
of business generated overseas and translated into
dollars for reporting purposes.
For example, IBM's earnings for the first quarter of
1998 would have been 12 cents higher than the
$1.06 per share the company reported, were it not
for the impact of currency.
Asia, which accounts for just less than 20 percent
of IBM's total revenues, is expected to show
continued second-quarter weakness, but North
America and Europe should compensate.
As it did in the first quarter, IBM's PC business is
expected to drag down second-quarter results as
the PC industry continued to struggle with a glut of
excess inventory which triggered a fierce price war
in the first half of 1998.
While the Armonk, New York-based computer
giant is expected to report progress on reducing the
amount of PC inventory it shipped to backlogged
distributors, PC revenues will remain flat or decline
year-over-year as a result, analysts said.
In June, several brokerages scaled back profit
outlooks on fears over IBM's PC business,
difficult-to-forecast currency impacts, and
weakness in mainframe revenues as customers wait
for IBM's new G5 series to ship in August.
Goldman Sachs analyst Laura Conigliaro wrote at
the time that these and other weaknesses "have
probably all but eliminated upside possibilities for
the current quarter."
Resulting investor jitters drove IBM stock to a
quarterly low of $106, down from all-time record
of $129 in May.
But the stock has recovered since late June, as
quarterly reports from other high-technology
companies have repeatedly beat expectations and
more bullish analysts have argued that certain
company-specific fears about IBM are overblown.
IBM stock closed Friday at $120.19, up $1.81 on
the day, in composite trading on the New York
Stock Exchange.
Salomon Smith Barney analyst John Jones has
played down fears of a mainframe product sales
shortfall, arguing IBM has a program in place to
avert a purchasing slowdown.
To prevent customers from delaying purchases,
IBM has encouraged customers to continue to buy
older mainframes prior to delivery of new G5
machines in August by promising upgrades to the
older machines once the G5 becomes available, he
said.
Wall Street generally expects a brighter second half
for IBM as key concerns weighing down
second-quarter results are lifted in the current third
quarter and future periods.
"You have all these near-term issues that start to go
away," Bear Stearns analyst Andy Neff said, citing
the progress IBM has made in slashing PC
inventories and the acceleration in revenues likely to
occur when new mainframes ship in August.
"IBM is in the strongest competitive position it's
been in in five years," Neff said.
|
