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IBM Corporation
In the seven years (since 1994), that Lou Gerstner has reigned over IBM, the company’s earnings per share have increased an average of 27% per year. This remarkable increase in earnings, has not gone unnoticed by the securities markets. Indeed, the company’s market value has grown from less than $30 billion to over $200 billion during this period. Use the following financial statement data to: 1. Decompose IBM’s ROE and discuss the factors (and trends) that contribute to Big Blue’s profitability 2. Evaluate IBM’s Revenue growth, Receivables, and Gross margins and over the period (be sure to control for seasonality in your evaluation) 3. Evaluate IBM’s Earnings per Share (basic), and Identify the factors most responsible for the increase in IBM’s earnings Write your answers in standard English. Be specific in your references, provide details of your computations, and be thorough in your explanations – I cannot read your mind.

EXHIBIT 1

IBM Selected Earnings Per Share Data For the Quarters Ended: Earnings Per Share (from continuing operations) Analyst Expected Earnings Per Share Difference % Surprise Jun-00 1.06 1.00 0.06 6.00% Mar-00 0.83 0.77 0.06 7.79% Dec-99 1.12 1.06 0.06 5.66% Sep-99 0.90 0.90 0.00% Jun-99 0.91 0.88 0.03 3.41%

All of the financial data in the tables that follow (except “per share figures”), are in millions. EXHIBIT 2

IBM Earnings per Share*
Jun-00 Earings per Share of Common Stock - Basic Average Number of Common Shares Outstanding - Basic Average Price per Share * All Data are Adjusted to Reflect stock splits $ 1.10 1,767.6 $ 109.34 $ Mar-00 0.85 1,777.2 111.00 $ Dec-99 1.16 1,793.0 102.95 $ Sep-99 0.97 1,805.2 123.61 $ Jun-99 1.32 $ Mar-99 0.80 1,823.8 88.28 $ Dec-98 1.27 1,839.5 82.91 $ Sep-98 0.80 1,856.9 62.20 $ Jun-98 0.77 1,879.2 57.97 $ Mar-98 0.54 1,946.6 51.12 $ Dec-97 1.08 1,929.6 52.05

$

$

$

1,812.1 $ 116.48 2 for 1 stock split 5/10/99

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$

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$

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EXHIBIT 2 (continued)

Sep-97 Earings per Share of Common Stock - Basic Average Number of Common Shares Outstanding - Basic Average Price per Share * All Data are Adjusted to Reflect stock splits $ 0.69 1,956.0 52.13 $

Jun-97 0.73 1,973.8 42.78 $

Mar-97 0.59 2,006.8 36.45 $

Dec-96 0.99 2,053.6 36.61 $

Sep-96 0.62 2,087.4 31.65

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$

$

$

$

2 for 1 stock split 5/9/97

EXHIBIT 3

IBM Consolidated Statements of Income For the Quarters Ended: Total Revenues Cost of Sales Gross Margin Selling, General and Administrative Expenses Research and Development Total Operating Expenses Operating Income Other Income (Expense), net Interest Expense Income Before Taxes Income Tax Expense Net Income $ Mar-00 19,348 $ 12,337 7,011 3,706 1,172 4,878 2,133 189 152 2,170 651 1,519 $ Dec-99 24,182 $ 15,299 8,883 4,445 1,416 5,861 3,022 134 171 2,985 896 2,089 $ Sep-99 21,144 $ 13,580 7,564 3,501 1,383 4,884 2,680 134 185 2,629 867 1,762 $ Jun-99 21,905 $ 13,681 8,224 2,846 1,293 4,139 4,085 155 197 4,043 1,652 2,391 $ Mar-99 20,317 $ 13,059 7,258 3,937 1,181 5,118 2,140 134 174 2,100 630 1,470 $ Dec-98 25,131 $ 15,322 9,809 5,074 1,407 6,481 3,328 187 213 3,302 956 2,346 $ Sep-98 20,095 $ 12,628 7,467 4,057 1,240 5,297 2,170 122 160 2,132 638 1,494 $ Jun-98 18,823 $ 11,677 7,146 3,812 1,220 5,032 2,114 130 161 2,083 631 1,452 $ Mar-98 17,618 $ 11,168 6,450 3,719 1,179 4,898 1,552 150 179 1,523 487 1,036 $ Dec-97 23,723 14,205 9,518 5,060 1,425 6,485 3,033 173 194 3,012 919 2,093

$

EXHIBIT 3 (continued)

Total Revenues Cost of Sales Gross Margin Selling, General and Administrative Expenses Research and Development Total Operating Expenses Operating Income Other Income (Expense), net Interest Expense Income Before Taxes Income Tax Expense Net Income

$

$

Sep-97 18,605 $ 11,507 7,098 3,932 1,162 5,094 2,004 162 183 1,983 624 1,359 $

Jun-97 18,872 $ 11,471 7,401 3,958 1,221 5,179 2,222 137 179 2,180 734 1,446 $

Mar-97 17,308 $ 10,716 6,592 3,684 1,069...
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