Financial Statement Analysis
IBM and Microsoft
Bill Jacoby 4/20/2010
Financial Statement analysis for two comparable companies; IBM and Microsoft
ACC-615 Dr. Finn; William Jacoby
Microsoft Corporation is the world’s largest software company. Microsoft has five operating segments; client, server and tools, online business services, Microsoft business division and entertainment and devices division. They develop personal computing software including the Windows operating system which runs 90% of all PC’s currently in use and the Office application suite and the XBOX video game system. International Business Machines Corporation was founded in 1911 and has grown and adopted over nearly a century. IBM is nick-named “big blue” by Wall Street in reference to it being a quintessential blue chip stock. IBM currently is an information technology company that has four business segments; hardware, financing (to facilitate clients acquisition of IBM systems, software and services), services, software. I thought these two dominant, global, large-cap technology companies would be interesting to compare. First let us review IBM. IBM has continued to deliver steady revenue over a long period of time. They offer a wide array of technology products. Since 2000 IBM has added $12 billion to pre-tax profit base, increased pre-tax margin 2.5 times and quadrupled earnings per share and more than doubled free cash flow. They have achieved this by transforming over the last decade to emphasize software and services and reducing the hardware segment. IBM pursued this strategy a decade ago because they felt the global IT industry and broader world economies were changing to demand integration, computing architecture, data intelligence and innovation. IBM has successfully capitalized on recognizing the demand for products and services they had an advantage in. They exited some of their hardware business, selling the PC hardware business to Lenovo in 2005 for $1.75 Billion. It is safe to say IBM has successfully evolved from a computer hardware vendor to a systems, services and software company.
ACC-615 Dr. Finn; William Jacoby
The pre-tax income produced in each segment of business was; hardware accounted for 7% or $1.4 billion in pre-tax revenue, financing 9% ($1.7 billion), services 42% (8.1 billion), software 42% (8.1 billion). IBM is the second largest vendor in software sales behind Microsoft. IBM’s hardware products are now only mainframe computers, data storage systems and microprocessors. Hewlett Packard and Dell are the main competition in this segment. The software business focuses on operating systems, infrastructure management for data centers, application middleware for software development and deployment. They compete with Oracle and Microsoft in this segment. The services organization offers contracts to maintain and manage operations of large data centers, business process outsourcing, and developing custom systems. These contracts are typically five to seven years for the engagement and are a good source of predictable recurring revenues. They compete with Hewlett Packard, Accenture, Computer Sciences and Infosys in this business. IBM is the most trusted brand and it has a strong product portfolio which results in an edge winning new service business contracts. The management of IBM describes the business strategy for the next decade as “the decade of smart”. Here they outline the four major growth opportunities they are focusing on. The first of these is growth markets. For IBM this is clients across 170 countries where infrastructure is being invested in or upgraded. IBM estimates that $2 trillion has been earmarked for infrastructure improvements by governments across the world and they have a great opportunity to capture a large portion of this spending. The second is “analytics”. IBM has seven analytics solution centers around the world that employ 4,000 consultants, 200...