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Five-year Forecast

Barring IBM's adoption of our three-pronged recommendation, Big Blue as we know it today will begin to shrink again after 2004. And it may never again reach or surpass the revenue peak of $88.4 billion it attained in 2000.

We expect IBM revenues to decline at a compound annual rate of 1% during the next five years (2003-2007). But, the revenues will grow by about 8% this year, and before flattening out in 2004. After that, stand by for their descent to pre-1997 levels ($78 billion) over the following three years (see the chart on page 2).

IBM 2002 revenues were merely at the same level it was five years earlier (in 1998), which means that, unless IBM adopts an aggressive acquisition strategy, the company will have wasted a decade by basically staying put or shrinking.

One reason for an expected lack of growth over the next five years is that IBM is in too many declining businesses. The only Big Blue business unit that can be expected to show any kind of growth is IBM Global Services (IGS).

We figure that the services (without maintenance) will grow by about 7% annually between 2003 and 2007. That's when it will account for about $43.4 billion or 56% of IBM's total revenues. With maintenance, which we figure will decline at about 3% annually; IGS will represent about 61% of IBM's total in 2007.

IBM hardware products, on the other hand, not long ago the mainstay of Big Blue's business and its pride and joy, will drop by 13% compounded annually between 2003 and 2007. Hardware will account for only $16 billion or just over one-fifth of IBM revenues five years from now.

Software revenues will also drop, albeit at a slower rate. They will decline at 1% annually to 16% of IBM 2007 revenues. As a result, IBM profit margins will erode as will the company's earnings. Big Blue gross margins have already dropped from 56% to 37% between 1990-2003. Operating margins shrank from 16% to 11% during the same period.

IBM net margins, on the other hand, had remained relatively stable between 1990-2001 (at about 8% to 9%), despite the many turbulent changes that had taken place at Armonk during the 1990s decade. Then they tumbled to 4.1% in 2002, mostly on the heels of the write-offs associated with sale of hard disk products to Hitachi.

We expect the IBM net margins to bounce back this year to just over 8%, and then rise again to 9% in 2004. After that, however, the negative effect of IBM's declining hardware businesses will take its toll on IBM earnings. As a result, the net margins will slide down to about 5% in 2007.

IBM Global Services (IGS) unsurprisingly accounted for the largest share of IBM's revenues in the last 10 years - $303 billion or 34% of the total.

In the latest full year (2002), IBM's only "crown jewel" of the 1990s accounted for $36 billion or 45% of the total, up 8% from the year before. Both sets of figures include maintenance revenues.

Led by a surge in outsourcing in the mid-1990s, IBM services (excluding maintenance) also topped all other segments in terms of growth. Outsourcing grew at 19% compounded annually in the last five years (1997-2002), while the overall services revenues increase at 8% per year during the same time frame.

Reference: http://www.truthinmedia.org/Bulletins2003/09_IBM_5Yr.html

IBM Research recently provided its Global Technology Outlook, the GTO is essentially a seven- to eight-hour presentation in which scientists from IBM's storied research division discuss what they think will emerge as major technology trends over the next three to five, or even 10, years. Ideally, IBM then comes up with ways to capitalize on the trends.

This year's GTO encompassed five topics. They were:

Silicon manufacturing

Chip designers will have to incorporate new structures and chemicals into their chips, but they won't have to swap the silicon base with more radical materials for a decade or more.

Two years ago, IBM was less optimistic about the future of silicon, but the ability of engineers to keep shrinking transistors continues to surprise him.

Sensors

Governments, established corporations and start-ups have all shown increasing interest in sensors that can more easily track the movement of cargo, cars or even people. But what do you do with all of the data collected by the sensors? IBM will likely start to look into ways of combining sensor networks with data mining (developed originally by Rakesh Agrawal at IBM). Conceivably, amassing the data from several sensor networks could enable researchers to better understand traffic patterns or the early warning signs of disease outbreaks.

Application processors

Now that multicore processors exist that contain hundreds of millions of chips, it is becoming more economical to produce chips, or cores within chips, that perform specific functions. A significant market for math processors and other specialty chips existed years ago, but many functions got absorbed into general-interest microprocessors. The pendulum is now swinging the other way, because of the complexity of workloads and the large transistor budgets available to today's designers.

Everyone makes software

IBM and others will have to come up with tools to make writing programs easier, but also tools to ensure that these ad hoc applications can play well in existing corporate environments.

Services 2.0.

Everyone needs services, and IBM has tied its future to it. One of its big aims is to more acutely study the way organizations