[876] in comp.os.os2.announce archive
IBM: Chairman's Letter to Investors
daemon@ATHENA.MIT.EDU (Timothy F. Sipples)
Sat Mar 30 11:08:43 1996
To: os2ann.DISCUSS@bloom-picayune.MIT.EDU
Date: 30 Mar 1996 14:11:23 GMT
From: tsipple@vnet.IBM.COM (Timothy F. Sipples)
Reply-To: tsipple@vnet.IBM.COM (Timothy F. Sipples)
Reply-to: tsipple@vnet.IBM.COM (Timothy F. Sipples)
Submitted by: tsipple@vnet.IBM.COM (Timothy F. Sipples)
Source: tsipple@vnet.IBM.COM (Timothy F. Sipples)
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Chairman's Letter to Investors
(From the 1995 IBM Annual Report)
Dear Fellow Investors:
Last year I told you that the question about IBM was no longer one of
survival. IBM had been stabilized and strengthened. The important
question--the relevant question--was, could IBM grow? By just about any
measure, the answer in 1995 was that IBM could indeed grow.
IBM reported record revenues last year, topping $70 billion for the first
time. Our rate of revenue growth--12 percent over the previous year--was the
best in more than a decade.
We doubled our earnings to $6.3 billion, excluding a one-time charge related
to the acquisition of Lotus Development Corp. and two special items taken in
the fourth quarter.
Our cash flow was very strong. We ended the year with $7.7 billion in
cash--and that's after spending $5.7 billion to repurchase IBM stock and $2.9
billion to acquire Lotus.
One of the best indicators of our progress--and the one that probably matters
most to investors--is market value. Last year IBM's market value grew by $6.9
billion, an increase of 16 percent. Since the summer of 1993, when we
announced our restructuring program, through year-end 1995, IBM's market value
improved nearly $27 billion.
Just as significant, I believe, is that IBM is growing pretty much across the
board, and that our businesses with the greatest growth potential are the ones
that are growing the most:
o Services grew to become our second-largest source of revenue, up 31
percent over 1994. Today IBM is the world's largest information
technology services company, with more than 80,000 people providing
consulting, systems integration and solution development services
worldwide.
o Few people know it, but IBM is the world's largest software company, too.
Our acquisition of Lotus helped increase our software revenues 12 percent
to $12.6 billion. We're already seeing encouraging results from the
merger. Since we combined, the installed base of Lotus Notes has more
than doubled. More Notes installations (we call them "seats") were sold
in the last half of 1995 than in the whole prior six-year life of the
product. We expect continued robust growth with the recent introduction
of Notes Release 4, which has many enhanced features for the Internet.
o We continued to revamp and strengthen our hardware offerings. New
products introduced in the past 12 months accounted for nearly half of
last year's $35.6 billion in total hardware sales, which grew 10 percent
from 1994.
o Our OEM revenue--sales of components and technology to other
companies--grew 38 percent last year to $4.5 billion. That's about three
and a half times greater than 1993 OEM revenues. Our microelectronics
unit was the biggest driver of this growth, with OEM sales of more than
$2 billion in 1995.
o Revenues increased in every geographic area, with the most significant
growth in our Asia Pacific region. Last year the Netherlands and
Switzerland became our tenth and eleventh countries to each generate more
than $1 billion in revenue. We continue to grow rapidly in China, India,
South Africa and other emerging nations. IBM is today the leading
computer company in China.
And, we are making investments that will fuel continued growth:
o In 1995 we increased our capital spending for the first time since 1991,
investing in high-growth areas such as semiconductor manufacturing and
services. Last year we invested $4.7 billion, up from $3.1 billion in
1994.
o We are making select strategic acquisitions, most notably Lotus and, more
recently, Tivoli Systems. As opportunities arise to strengthen our
ability to serve our customers, there will likely be others.
o We are expanding and investing in our most important asset-- IBM people.
Last year we hired about 15,000 new people, most of them for our sales
and services businesses. In fact our overall workforce grew in 1995. We
began implementing an incentive-based compensation system that pays
better rewards to our star performers at all levels of the company. We're
taking an intensive look at our overall compensation system to make sure
we are paying at competitive levels. And, we are revving up all-new
employee training programs that increase skills and career development.
Just about any way you look at IBM--from performance to potential--we are
growing.
So now what? Now that our financial foundation is again strong, now that we
are growing, now that we seem to have some momentum-- what's the next
mountain?
Which brings me to the V-word.
Almost three years ago--July 1993--I announced a massive restructuring of IBM.
We were having serious financial problems. In fact, financially it was the
worst year in our proud history. No one suffered more than our employees, who
were stunned. For everyone else--customers, shareholders, suppliers,
analysts--it was red alert.
During the press conference, I said, "The last thing IBM needs right now is a
vision." Almost immediately, there was a lot of whooping and hollering in the
media about IBM wandering, visionless, through the wilderness.
So it's with an enormous sense of irony that now, almost three years later, I
say this: What IBM needs most right now is a vision.
I don't mean a slogan. I don't mean promises and vaporware (announced products
that don't exist now and never will). I don't mean
here's-what's-good-for-IBM-and-therefore-it's-good- for-you-too.
Here's what I do mean:
We've seen great changes in computing before--from centralized mainframes to
decentralized PCs to distributed client/server computing.
We now realize that client/server is not a full-blown phase of computing. It's
the leading edge of what will be the next phase--what we call network-centric
computing. I'll admit it's a cumbersome name, if not out-and-out dull. (I'd
like to come up with something snappier, but I think it's too late.) But what
we call it is less important than what it describes: a powerful change that
has sweeping implications for individuals and institutions of all kinds.
From a pure technology perspective, the networked world begins with new
communications capabilities that allow digital networks to handle rich sources
of information: video, high-resolution images, voice and music. High
transmission speed also allows these networks to support
interaction--real-time collaboration between people.
The Internet, of course, stands as the most prominent living representation of
global networking. Some estimates say a billion people will have Internet
access by the year 2000. Yet, as with previous market shifts, the driving
force of this change is not raw technology. After all, the Internet has been
around-- albeit quietly--for 25 years.
The real catalyst of this new era is a powerful set of emerging customer
priorities. Everywhere you look today, businesses and institutions alike, you
see the need for things like more speed to market, more flexibility and
nimbleness, accelerated global expansion, and more customer and supplier
integration. People around the world are finding that networks are highly
effective tools to meet these priorities, and to communicate across and among
enterprises and people.
And because networks can support interactivity and transport rich content,
they are redefining things like value, competitiveness and the very nature of
commercial transactions. Networks are changing the way we work, receive
government services, educate our children and enjoy entertainment. We're
already seeing people and organizations use networks to do real work and get
real results. They're moving from surfing to working, from browsing to buying.
You'll see examples of that throughout this Annual Report.
So this convergence of two powerful forces--customer need and advanced network
technology--leads IBM to a strategy, or vision, that is simple and clear, and
consistent with our company mission. IBM will lead the transition to
network-centric computing by:
o Continuing to create the advanced products and technologies needed to
make powerful networks real; and
o Working with our customers to help them fully exploit these networks.
First, customers. Our customers look to IBM to provide the skills and
expertise that will allow them to use networks in meaningful ways. They are
asking for our assistance in extending their assets and brands to reach new
markets and customers via networks. That's why services is one of our
fastest-growing businesses and now our second largest.
Unlike some in our industry, we don't want to displace our customers by
inserting ourselves in front of their own customers. Our job is to help our
customers leverage their information to their advantage. After all, the most
important and valuable content in the world is the intellectual property
housed in the information systems of corporations and institutions. Most of
this information resides in IBM databases and is processed by IBM computing
systems. We are rapidly adapting our systems and delivering new services that
allow customers to move their content to networks--and do it with the security
and reliability they have come to expect from IBM.
An increasing number of customers are signing up with the IBM Global Network,
the world's largest data network and Internet services provider. We run it as
sort of an "information utility," giving customers the option of subscribing
to a rich portfolio of applications and as much or as little computing power
and connectivity as they need. They pay for only what they use, sometimes on a
usage or transaction basis (most people now call it "per click"). For IBM,
this has the added advantage of creating a recurring revenue stream.
On the technology side of the equation, we are moving on many fronts.
We are developing and bringing to market new networking technologies--Web
servers, groupware, intelligent agents and encryption technologies for secure
electronic transactions, to name just a few.
Our strengthened financial position gives us the flexibility to consider
acquisitions that will broaden and complement our offerings and worldwide
development teams. Where these make good business sense for both parties, we
move quickly. Our mergers with Lotus and Tivoli Systems are the two most
visible recent examples.
I should add that far more important than the technologies we gain through
these moves are the thousands of talented people who bring to IBM fresh
perspective and drive. They are very welcome additions to the IBM family.
Perhaps the greatest product opportunity we see lies in leveraging IBM's vast
existing portfolio--scalable servers, middleware, networking, systems
management, microelectronics, storage. We've worked hard to put all our
products on the absolute leading edge of technology, to ensure they are cost-
competitive with any offerings in the industry, support open industry
standards and work effectively in distributed computing environments. All of
this work and investment will serve us well as we move into the networked
world.
Consider the implications of global networks as they become the locus of
commerce and communications and, over time, of computing itself. Databases
expand enormously. Transactions skyrocket. Demand grows rapidly for products
that move, manage, store, process, present and protect all of this
information.
This is one of the reasons we shipped to customers more mainframe computing
power in 1995 than in any year in history. In fact, in the fourth quarter of
1995 alone, we shipped 80 percent more mainframe computing power than in the
fourth quarter of 1994.
So this new model of computing does not displace or replace everything that
has existed in previous models. And its success does not depend on some piece
of "killer" technology created and controlled by any one company. In fact, the
networked world--by definition--must remain open to support seamless access
and navigation to people and information. The very market forces that are
creating it will repel any company's attempt to erect proprietary walls.
Customers will simply not embrace innovation created to enrich the inventor
without enriching the network.
Perhaps IBM's greatest strength as we pursue these opportunities is our
experience. Simply put, network-centric computing feels right to us. We
understand powerful computing, how to solve complex problems, how to work with
customers to develop global solutions. We've been doing this, with great
success, for decades.
Of course, in a company of IBM's size and breadth, not every strategic project
and priority fits neatly under the network- centric computing banner. With
vigor and determination, we continue to pursue our OEM, emerging market and
consumer strategies.
We continue to invest heavily in research and development. I should note here
that in 1995, IBM was number one in U.S. patents issued for the third
consecutive year. And we beat our own record in receiving more patents than
any company in any year.
We continue to fine-tune IBM's operations to improve efficiency and
productivity, mostly through our reengineering projects. Since 1993, these
projects have reduced cost and expense by more than $7 billion.
But for the first time in nearly 30 years, we have an opportunity to align
virtually every part of IBM in a single direction. Network-centric computing
has emerged as our integrating strategy--the vision guiding our investments,
products, services and our people.
* * *
Two final thoughts:
First, it's easy to get caught up in the potential and promise of these new
technologies, and how we see them applied by people and institutions. Yet,
some people are concerned--rightly--that this technology is creating a lot of
new issues regarding privacy, security, censorship and universal access, and
the possibility of a world of haves and have-nots. These are all legitimate
concerns, and we must deal with them.
As a leader in creating networks and as a citizen of the world, we at IBM take
our responsibilities seriously. We will do everything we can--and work with
governments and others--to help ensure that our technology works to the
benefit of all people, everywhere. If properly managed, these technologies,
rather than creating new problems, can solve centuries-old problems for people
and societies. The powerful networks we are building can bring the best
doctors to the neediest patients. They can bring education to children in
remote villages. They can bring information and the whole rest of the world to
the oppressed.
* * *
Finally, I want to personally thank the people who brought IBM back from the
brink to this new point of opportunity--the employees of IBM, most of whom are
shareholders.
You never, never, never quit. Others said IBM was dead, but you rolled up your
sleeves, picked up the bricks and rebuilt your company, day by day, product by
product, customer by customer. Wherever I was in the IBM world, at night I saw
the lights still on in your offices. The next morning, I saw all the empty
pizza boxes.
We're not done yet--because we'll never be done. But the fact that we've come
this far this fast is testimony to your grit and to your stubborn
determination to win.
I'm very proud to work alongside you.
Thank you.
Louis V. Gerstner, Jr.
Chairman and Chief Executive Officer
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