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TBR 1Q11 IBM Global Services Report
TBR 1Q11 IBM Global Services Report
TBR 1Q11 IBM Global Services Report
TBR 1Q11 IBM Global Services Report
TBR 1Q11 IBM Global Services Report
TBR 1Q11 IBM Global Services Report
TBR 1Q11 IBM Global Services Report
TBR 1Q11 IBM Global Services Report
TBR 1Q11 IBM Global Services Report
TBR 1Q11 IBM Global Services Report
TBR 1Q11 IBM Global Services Report
TBR 1Q11 IBM Global Services Report
TBR 1Q11 IBM Global Services Report
TBR 1Q11 IBM Global Services Report
TBR 1Q11 IBM Global Services Report
TBR 1Q11 IBM Global Services Report
TBR 1Q11 IBM Global Services Report
TBR 1Q11 IBM Global Services Report
TBR 1Q11 IBM Global Services Report
TBR 1Q11 IBM Global Services Report
TBR 1Q11 IBM Global Services Report
TBR 1Q11 IBM Global Services Report
TBR 1Q11 IBM Global Services Report
TBR 1Q11 IBM Global Services Report
TBR 1Q11 IBM Global Services Report
TBR 1Q11 IBM Global Services Report
TBR 1Q11 IBM Global Services Report
TBR 1Q11 IBM Global Services Report
TBR 1Q11 IBM Global Services Report
TBR 1Q11 IBM Global Services Report
TBR 1Q11 IBM Global Services Report
TBR 1Q11 IBM Global Services Report
TBR 1Q11 IBM Global Services Report
TBR 1Q11 IBM Global Services Report
TBR 1Q11 IBM Global Services Report
TBR 1Q11 IBM Global Services Report
TBR 1Q11 IBM Global Services Report
TBR 1Q11 IBM Global Services Report
TBR 1Q11 IBM Global Services Report
TBR 1Q11 IBM Global Services Report
TBR 1Q11 IBM Global Services Report
TBR 1Q11 IBM Global Services Report
TBR 1Q11 IBM Global Services Report
TBR 1Q11 IBM Global Services Report
TBR 1Q11 IBM Global Services Report
TBR 1Q11 IBM Global Services Report
TBR 1Q11 IBM Global Services Report
TBR 1Q11 IBM Global Services Report
TBR 1Q11 IBM Global Services Report
TBR 1Q11 IBM Global Services Report
TBR 1Q11 IBM Global Services Report
TBR 1Q11 IBM Global Services Report
TBR 1Q11 IBM Global Services Report
TBR 1Q11 IBM Global Services Report
TBR 1Q11 IBM Global Services Report
TBR 1Q11 IBM Global Services Report
TBR 1Q11 IBM Global Services Report
TBR 1Q11 IBM Global Services Report
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TBR 1Q11 IBM Global Services Report

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Technology Business Research is a different kind of research company. Our bottoms-up approach provides a look at the technology industry unlike anything you’ve seen before. We analyze company …

Technology Business Research is a different kind of research company. Our bottoms-up approach provides a look at the technology industry unlike anything you’ve seen before. We analyze company performance in professional services, networking and mobility, computing and hardware, and software on a quarterly basis, leveraging our data to create industry benchmarks and landscapes that provide a business perspective on leaders and laggards and their business plans. We are experts in the business of technology.

IBM Global Services (IGS) remains a formidable competitor in the IT services industry. IGS’ broad portfolio of high-value and high-growth offerings, geographic diversification and strong service delivery model will help propel top- and bottom-line growth through 2010. IGS is gradually rebuilding its growth momentum, investing in areas with high demand and successfully finding new pockets of opportunity (e.g., analytics, cloud computing, emerging markets). IGS will reach its margin growth aspirations as a result of its global integration and focus on higher-value offerings and efficiency and productivity initiatives.

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  1. Technology Business ResearchAccelerating Customer Success Through Business Research TBR T E C H N O L O G Y B U S I N E S S R ES E AR C H , I N C .
  2. PROFESSIONAL SERVICES BUSINESS QUARTERLYSMIBM Global ServicesFirst Calendar Quarter 2011First Fiscal Quarter 2011 Ended March 31, 2011 TBR OUTLOOK – POSITIVE TBR SCORE (0-10 SCALE)  6.28Publish Date: May 6, 2011Author: Elitsa Bakalova (elitsa.bakalova@tbri.com), PSBQ Analyst TBR T E C H N O L O G Y B U S I N E S S R ES E AR C H , I N C .Content Editor: Alison Crawford, PSBQ Senior Analyst
  3. Contents TBR Company Analysis Company Data Models 3 TBR Position 26 Income Statements 4 Executive Summary 28 Balance Sheet 7 Strategy Overview 29 Service Line Model 9 Corporate SWOT Analysis 30 Geographic Model 13 Financial Model Strategy 31 Vertical Revenue Model 16 Go to Market & Services Strategies 32 Operating Expenses 21 Alliance & Acquisition Strategies 33 Headcount Model 23 Geographic Analysis 34 Financial Strategy Graphs 24 Resource Management Strategy 36 Go-to-Market Graphs 26 Appendix 37 Resource Management Graphs 39 Acquisitions Tables 42 Portfolio of Services Please use 43 Recent Service Announcements this link 44 Vertical Offerings to complete a brief survey 45 Quarterly Signings Tables on this report. 50 Strategic Alliance Tables 52 Organization Chart 53 Worldwide Locations Table www.surveymonkey.com/s/TBR-IBM_GS 55 About TBR3 IGS 1Q11 | Professional Services Business Quarterly ©2011 Technology Business Research, Inc.
  4. TBR Position TBRIBM will continue to successfully meet demand and build servicesgrowth momentum through 2011TBR Assessment Corporate Strategic ObjectivesIBM Global Services (IGS) remains a formidable Grow services business at/above market and expandcompetitor in the IT services industry. IGS’ broad portfolio pre-tax income by 8% to 10% CAGR through 2015of high-value and high-growth offerings, geographic IBM has significantly improved its services businessdiversification and strong service delivery model will help model and offerings, which will help the companypropel top- and bottom-line growth through 2010. IGS is expand its client base and gain market share. IBM’sgradually rebuilding its growth momentum, investing in multi-lever approach to margin progression will help services profitability reach target levels.areas with high demand and successfully finding newpockets of opportunity (e.g., analytics, cloud computing, Continue to expand in higher-value, rapid growth areas (Smarter Planet, business analytics andemerging markets). IGS will reach its margin growth optimization and cloud computing)aspirations as a result of its global integration and focus IBM’s key differentiator is its ability to adjust offeringson higher-value offerings and efficiency and productivity to demand and provide cross-IBM solutions (services,initiatives. software, hardware and research) that create value for clients. While IBM has already gained footholds with IBM AND IGS 1Q11 PERFORMANCE VS. EXPECTATIONS clients in the three strategic offerings areas, rising(in $ millions) Consensus Guidance Range Actual global demand will help the company increaseIBM Revenue $24,020 $23,410 - $24,470 $24,607 business with existing clients and score new clientIBM Services Revenue (external) N/A $14,000 - $15,000 $14,573 wins.IBM Services Operating Income N/A N/A $1,878IBM Non-GAAP EPS $2.30 $2.19- $2.37 $2.34 Invest in skills and capabilities in emerging markets to diversify revenue and service delivery network IBM AND IGS 2Q11 GUIDANCE AND EXPECTATIONS While the major markets will remain IBM’s leading(in $ millions) TBR Estimate Consensus Guidance Range service revenue contributor, the company willIBM Revenue $25,200 $25,110 $24,640 - $26,130 continue to have success in the emerging marketsIBM Services Revenue (external) $14,266 N/A $14,000 - $15,000 (18% of services revenue in 2010). In addition toIBM Services Operating Income $2,139.85 N/A N/A revenue possibilities in emerging markets, IBM hasIBM Non-GAAP EPS N/A $3.00 $2.93-$3.09 established a successful lower-cost service delivery model that drives benefits on the profitability side.4 IGS 1Q11 | Professional Services Business Quarterly ©2011 Technology Business Research, Inc.
  5. Executive Summary TBRIGS’ large revenue base, growing backlog and stable profitability remainkey pillars that allow the organization to outperform its peers TBR Company Average Standard CALENDAR QUARTER RESULTS TBR SCORING SUMMARY:FINANCIAL METRICS Score Figure in Class Deviation 1Q10 2Q10 3Q10 4Q10 1Q11Operating Margin 5.47 12.5% 9.4% 5.8% Financial Model Strategy: 6.14 6.25 6.22 6.32 6.23Current Ratio 3.91 1.18 1.77 49.7% Go-to-Market & Services Strategies: 7.35 7.15 7.00 6.98 6.92Debt-to-Asset Ratio 3.17 0.80 0.57 12.4% Resource Management Strategy: 5.47 5.66 5.70 5.75 5.69Return on Assets (TTM) 6.39 13.9% 8.1% 3.7%Return on Equity (TTM) 9.23 67.6% 17.8% 12.9% TOTAL AVERAGE TBR SCORE: 6.32 6.36 6.31 6.35 6.28TOTAL AVERAGE TBR SCORE 6.23 TBR Company Average StandardGO-TO-MARKET & SERVICES METRICS Score Figure in Class DeviationRevenue (in $ Millions) 10.00 $14,266 $2,400 $1,324 IBM’s large services revenue base, strongRevenue Growth YTY 4.53 6.2% 14.3% 7.8% backlog, stable profitability and highBacklog/Revenue 6.40 2.41 1.96 0.35Day Sales Outstanding 7.05 41.30 65.69 9.75 utilization allowed the company to report 6.92 above-average scores against itsTOTAL AVERAGE TBR SCORE competitors. TBR expects IGS to TBR Company Average Standard accelerate its growth through 2011. TBRRESOURCE MANAGEMENT METRICS Score Figure in Class Deviation also expects IGS’ focus on strengtheningGross Margin 5.12 31.7% 31.0% 5.9% its geographic footprint, offshore serviceOperating Expenses as a % of Revenue 5.24 18.8% 20.0% 4.2%Revenue per Employee (TTM) 5.79 $235,482 $178,720 $65,064 delivery and productivity to driveOperating Income per Employee (TTM) 5.76 $35,375 $18,405 $22,232 profitability benefits.Utilization Rate 8.17 86.2% 77.2% 2.9%Turnover 4.94 15.2% 15.0% 1.8%TOTAL AVERAGE TBR SCORE 5.69 Key Represents an area where IGS is currently challenged versus peers Represents an area where IGS is outperforming its peers Represents an area where IGS is neither significantly outperforming nor underperforming its peers5 IGS 1Q11 | Professional Services Business Quarterly ©2011 Technology Business Research, Inc.
  6. Executive Summary TBRA stronger portfolio and delivery model will help IGS expand client reachTBR assessment of IBM Global Services’ two-year strategic outlookKey Takeaways Strategic OutlookFinancial: Recovery in the IT services market, coupled • While outsourcing was the lead revenue and growthwith IGS’ concerted efforts to grow profitably, will contributor in 1Q11 (46.8% of total services revenue)allow the organization to achieve the financial goals and will be in 2Q11, improving demand in consulting &on its 2015 Roadmap. SI also positively impacted IGS’ growth in 1Q11.Go to market: TBR expects IBM to focus on • There may be pockets of uncertainty in some servicemaintaining growth in consulting & SI, as demand is areas (e.g., transactional signings declined 1% year-to-improving and IBM is strengthening its portfolio. year due to public sector challenges, indicating there may be temporary growth slowdown in transactionalResource: IGS will continue to strengthen its globally business areas such as consulting & SI, as transactionalintegrated service delivery capabilities, especially in signings trends are similar to revenue trends); however,lower-cost locations. Adoption of common delivery this slowdown will not have a major negative effect onmethods and automation will remain a key driver of IGS’ overall revenue performance. TBR expects themargin improvement. positive demand trend in consulting & SI to remain in TBR IGS EXTERNAL REVENUE, GROWTH AND PROFITABILITY the near term. Investments in portfolio expansion in this $70 25% service area will help IGS gain traction with clients. $56.4 $58.9 $61.8 $55.0 $60 15% • Success in the growth markets and high-growth service $50 areas such as business analytics and cloud computing In $ Billions $40 $30 5% will complement IGS’ core business expansion. $14.6 $14.3 $20 $13.7 $13.7 $14.1 $14.9 $8.1 $8.1 $8.8 $9.7 -5% • Overall, IGS will continue to see its revenue and profit $10 $2.1 $0 $1.4 $2.1 $2.2 $2.4 $1.9 -15% expand during the rest of 2011. 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 CY09 CY10 CY11 CY12 Est. Est. Est. IGS External Revenue Pre-tax Income Revenue Growth Year-to-Year Operating Margin SOURCE: TBR AND IBM6 IGS 1Q11 | Professional Services Business Quarterly ©2011 Technology Business Research, Inc.
  7. Executive Summary TBRIBM’s delivery of integrated solutions will open doors to growthacross its business units in 2011 Segment Performance and Strategies Increasing outsourcing backlog will contribute to outsourcing revenue growth in IBM Global 2011. Challenges in the public sector may IBM SEGMENT REVENUE ServicesTBR cause a temporary growth slowdown for the $30,000 transactional business (largely for GBS $1,013 $25,000 Financing consulting and SI).Revenue i n $ Mi llions $537 $4,263 $20,000 $3,385 $6,138 STG $5,018 $15,000 IBM SW will continue to drive partner Software IBM $10,000 growth to expand its cloud and analytics Software $13,716 $15,080 ecosystem, as it strives to reach $7 billion in $5,000 Services Group $201 corporate cloud revenue by 2015. $0 Investments/ $(1,887) Eliminations -$5,000 1Q10 1Q11 Systems & IBM STG will lean on demand for analytics,SOURCE: TBR AND IBM Ca l endar Quarter Technology cloud and workload-optimized systems to Group drive revenue and profit growth across its solution set in 2011. IBM will leverage its financing arm as a key Global bargaining chip in solutions sales by Financing wrapping hardware and software together with financing.7 IGS 1Q11 | Professional Services Business Quarterly ©2011 Technology Business Research, Inc.
  8. Strategy Overview TBRProfitable growth at or above market levels is a top priority for IGS Function Key Strategies TBR Assessment Build a resilient, global business  IGS’ business mix transformation (focusing on higher- model that generates revenue value services), growth investments and margin Overall and profit improvement improvement activities continued to support the opportunities. organization’s financial performance in 1Q11.  TBR expects IBM will achieve its services growth and Grow services business profitability targets as it works on its 2015 Roadmap. at/above market and expand Financial The company has already gained solid ground in its pre-tax income by 8% to 10% four growth areas and will continue to see near-term CAGR through 2015. traction with clients.  We expect IGS to see revenue growth at mid-single • Gain traction in outsourcing; digits in 2011, which will be in line with overall IT benefit from improving services market growth. Outsourcing is seeing a stable consulting & SI demand. backlog; IBM expects revenue from the outsourcing backlog to account for ~85% of outsourcing revenue in 2011 and will grow 3% year-to-year. Consulting & SI demand is improving, which will positively affect IGS’ Go to Market near-term revenue performance. • Grow in line with IBM’s four  Following IBM’s overall growth agenda will help IGS growth areas (business develop its offerings portfolio, provide cross-IBM analytics, Smarter Planet, solutions (software, hardware and research), and gain cloud computing and growth clients through IBM’s marketing and business markets). development activities in the four areas. Key:  Working: Short-term impact expected on bottom / top line  Not working: No major impact or differentiation expected8 IGS 1Q11 | Professional Services Business Quarterly ©2011 Technology Business Research, Inc.
  9. Strategy Overview TBRIBM is leveraging alliances, acquisitions and integrated global servicedelivery to support growth Function Key Strategies TBR Assessment  IBM will continue to successfully enter strategic alliances to provide a full range of services and • Partner with IT companies, as strengthen its Smarter Planet, analytics and cloud well as educational and computing offerings. government institutions. Alliances &  IBM will continue to successfully acquire companies Acquisitions with intellectual property, high growth and margin • Support investments with opportunities to help shift its overall business mix and inorganic growth to expand position the company for growth. TBR expects IBM to capabilities. continue to invest its profit dollars in software and services acquisitions to support its business analytics and Smarter Planet offerings.  An integrated global service delivery, coupled with a • Leverage integrated global high grade of standardization, use of assets/tools that delivery capabilities for aid/automate service delivery, will continue to benefit service delivery, improve IGS’ bottom line. TBR believes IBM leads its productivity and efficiency. competition in integration, standardization and Resource & automation of its delivery model. Investments • Invest in skills and capabilities  Well-developed resources and capabilities for service in emerging markets to delivery from lower-cost regions around the globe diversify revenue and service remain key strengths for IBM. IGS’ nearshore/offshore delivery network. headcount reached ~135,000 FTEs (54.2% of total in TBR estimates) in 1Q11. Key:  Working: Short-term impact expected on bottom / top line  Not working: No major impact or differentiation expected9 IGS 1Q11 | Professional Services Business Quarterly ©2011 Technology Business Research, Inc.
  10. Corporate SWOT Analysis TBRIBM’s strength in services lies in its well-developed resources, industryand research expertise and ability to adjust its offerings to demand Corporate SWOT Analysis Strengths Opportunities • Able to successfully integrate acquisitions • Demand for analytics brings investments in IBM’s • Strong relationships with alliance partners business analytics and optimization • Strong IBM brand associated with reliability; backing • Growth potential of cloud computing can help IBM 1 from IBM as a whole gain traction • IBM’s Smarter Planet concept is a strong competitive • European markets are now more open to outsourcing differentiator; strong industry expertise functions to outside vendors • Integrated global delivery network and presence in • Gain traction in emerging markets due to demand low-cost locations and IBM’s growth investments • Ability to adjust its offerings to demand and create • Stabilizing consulting/SI demand can help IBM Global value for the client Business Services grow in the long run Threats • Uneven economic recovery in Europe may challenge Weaknesses 1 IGS’ near-term performance • Partnership network is difficult to manage • Indian vendors are becoming more active in business • Perceived as biased toward “Big Blue” solutions consulting and remote management ITO • IBM/IGS’ size can sometimes slow decision-making • Competition from other MNCs (e.g., Accenture, HP, and implementation processes etc.) and European and Indian firms for top clients • Disjointed go-to-market approach in smaller 1 • Attrition and intensifying competition in the labor geographies may decrease win rate market (especially in lower-cost locations and in service areas with increased demand)10 IGS 1Q11 | Professional Services Business Quarterly ©2011 Technology Business Research, Inc.
  11. Scenario Discussion TBRIBM is set for gains in consulting with additions to its offerings portfolioScenario Discussion: IBM is developing its consulting capabilities to capitalize on improving demandScenario SWOT Assessment • In anticipation of an uptick in the consulting industry, IBM is Strength: Well-developed high-end consulting investing in its consulting business (part of IBM Global Business capabilities (transformational, high-value) Services, or GBS). Weakness: Large matrix-managed organization • IBM is aiming to capture growth due to the gradual return of and red tape can slow processes discretionary spending, which was limited during the recession. Opportunity: Improving consulting & SI • Since the beginning of 2011, IBM GBS launched two new demand will help GBS grow in the near-term consulting services: a global consulting practice for business process management (to help clients improve core business Threat: Other IT service providers investing in processes) and a Smarter Commerce consulting practice (to help consulting capabilities to address demand clients adapt to customer demands). TBR believes IBM is making a smart move and will gain clients’ attention. IGS CONSULTING & SI REVENUETBR • Client demand for transformation on the operational side and $3.8 26.0% overall business growth is improving. Since the two demand $3.7 25.8% trends are addressed by the new consulting practices, we expect % of IGS External Revenue $3.71 $3.7 $3.69 25.6% IBM to see client wins in the near term.In $ Billions $3.6 $3.64 25.4% • We believe GBS is intensifying its hiring efforts in consulting to $3.6 $3.59 25.2% address demand. While GBS will attract professionals due to its $3.5 $3.54 25.0% strong IBM brand recognition, the organization will see $3.5 $3.48 24.8% competitive pressure as other IT service providers are also hiring $3.4 24.6% in consulting. $3.4 24.4% • GBS’ high focus on utilization in the past several quarters, aimed 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 at improving its profitability, may lead to employee burnout. In Est. addition, some consulting employees say bonuses and salary GBS Consulting & SI % of IGS External Revenue increases have contracted, which may lead to low motivation SOURCE: TBR ESTIMATES AND IBM levels or losses of potential candidates to competitors. 11 IGS 1Q11 | Professional Services Business Quarterly ©2011 Technology Business Research, Inc.
  12. Scenario Discussion TBR Investments in developing its analytics portfolio and capabilities will help IBM lead the market and create growth through 2015 Scenario Discussion: Investment in business analytics and optimization will support revenue growth Scenario SWOT Assessment • With a strong heritage in business intelligence, IBM has Strength: Ability to grow through a combination of services, invested significantly in recent years to develop its business software and hardware analytics and optimization (BAO) business and position it as a key pillar for the company’s growth through 2015. Weakness: May not be perceived as an agnostic analytics services vendor • The BAO consulting business started with 4,000 employees in 2009 and reached nearly 8,000 at the end of 2010. IBM’s Opportunity: Strong demand in an emerging and fast- analytics consulting capabilities allow the company to lead growth market segment with services, then pull through its strong analytics software Threat: Increasing competition for market share and talent offerings (expanded through acquisitions) and run the from other MNCs, European and Indian vendors solution on hardware. The combination of the three building blocks is a key differentiator for IBM that is hard for the Industry Solutions (go-to-market by industry) majority of competitors to match. Analytic Domains and Offerings • IBM leads the market by using its research capabilities to • Information management foundation identify key trends and insert innovation into BAO solutions. • Customer, sales and marketing analytics • An emphasis on industry-based solutions coupled with • Finance/risk/fraud analytics global service delivery capabilities allows IBM to provide Globally Integrated Capabilities BAO services catering to the needs of specific verticals. BAO • BAO strategy services are also closely tied with IBM’s Smarter Planet, • Business intelligence & performance management cloud computing and growth markets initiatives, allowing a multi-level expansion for the service area.SOURCE: IBM AND TBR • Advanced analytics and optimization • Enterprise information management • IBM’s ability to match demand with integrated, cross- • Enterprise content management functional solutions will help its BAO business achieve its revenue goals. The BAO business will reach $16 billion in Analytics Solutions Team total cross-IBM in 2015, up from $11 billion in 2010 (TBR BAO Center of Competence and Global Delivery estimates ~$4 billion was attributed to services). 12 IGS 1Q11 | Professional Services Business Quarterly ©2011 Technology Business Research, Inc.
  13. Scenario Discussion TBRAsset-based services will be key to IBM’s differentiation and growthScenario Discussion: Asset offerings drive revenue and margins for IBM and value for the clientScenario SWOT Assessment • IBM GBS is placing a strong emphasis on developing a portfolio of software assets (IP code assets and tools) that are sold aloneStrength: Assets bring service distinction and speed to or as part of a larger offering/solution.value for both IBM and the client • Such software assets allow both GBS and its clients to gainWeakness: Instilling an asset-based culture across the access to value and differentiation. The software assets allowGBS population may be challenging GBS to stand out from its competition as its leads in breadth ofOpportunity: Client demand for differentiation and offerings (both industry-specific and cross-industry) andspeed to value internal development capabilities.Threat: Intense competition from other MNCs • To build software assets, GBS leverages client engagements, IBM Research, IBM Software, GBS’ own software lab and GBS Software Assets acquisitions, allowing GBS to create a solution that best fits client needs. Bring distinction to GBS’ • The benefits for GBS come both at the top- and bottom-line services and competitive levels. Revenue generation is aided by a high degree of Differentiating differentiation. Examples: repeatability, but the main benefit is on the margins. Assets • IBM M&A Accelerator Profitability is positively affected by pre-built capabilities, asset • IBM Fraud & Abuse re-use, and the ability to enhance productivity and focus on Management System higher value-added activities. Solutions enabled with assets are Assets that enhance predicted to expand GBS’ operating margin by 200 basis point productivity and/or reduce through 2015. labor. Examples: • GBS’ business model shift to higher asset use comes hand-in- Speed to Value hand with a cultural transformation initiative. A fairly new tool Assets • Application development and implementation toolkit called Asset Hub gives GBS practitioners access to assets • Productivity accelerators associated with solution offerings. While GBS provides supporting SAP education and incentives for selling assets, cultural transformations typically take time, which may create SOURCE: IBM AND TBR challenges for GBS as it builds out its business model.13 IGS 1Q11 | Professional Services Business Quarterly ©2011 Technology Business Research, Inc.
  14. Financial Model Strategy: Revenue TBRRevenue growth will continue for IGS through 2011, in line withoverall IT services market performance Revenue Performance and Strategies IGS EXTERNAL REVENUE, GROWTH AND PROJECTIONS 1Q11 Revenue: $14.57 billion, 6.2% YTY (as reported)TBR 30% • IGS’ external revenue growth was led by outsourcing, $60.0 61.8 20% largely driven by backlog and expansion in existing 56.4 58.9 accounts.In $ Billions Revenue Growth $40.0 6.2% 4.3% 4.0% 2.6% 4.3% 5.0% 10% • The transactional business (consulting & SI and ITS) was 2.0% 2.1% 2.0% $20.0 0% positively influenced by improved signings during the past 13.7 13.7 14.1 14.9 14.6 14.3 several quarters. $0.0 -10% • IGS is seeing strong performance in growth initiatives 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 CY10 CY11 CY12 Est. Est. Est. (expansion in emerging markets, business analytics and IGS External Revenue Revenue Growth Year-to-year cloud). NOTE: Annual revenue and projections are for calendar 2010, 2011 and 2012, respectively. SOURCE: TBR AND IBM Revenue and Growth Outlook • Increasing outsourcing backlog will contribute to TBR IGS TWO-YEAR TRAILING 12-MONTH REVENUE outsourcing revenue growth in 2011. $75 • Public sector challenges may cause a temporary growth $57.46 $55.69 $54.70$55.00 $55.57 $55.84 $56.13$56.42 $57.28 $57.83 slowdown for the transactional business (largely for GBS consulting & SI). In $ Billions $50 • Overall, TBR believes IGS’ external revenue will continue $25 to grow through 2011, at levels in line with overall IT CY09 CY10 services market performance. $- • IGS will look to increase its business in growth markets 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 Est. around the world. Outsourcing will continue to see SOURCE: TBR AND IBM. increased traction (outsourcing signings in the growth markets grew 250% year-to-year in 4Q10 and 100% year- to-year in 1Q11).14 IGS 1Q11 | Professional Services Business Quarterly ©2011 Technology Business Research, Inc.
  15. Financial Model Strategy TBRGrowing outsourcing backlog will help IGS retain positive momentumin its outsourcing business (both in GTS and GBS) Service Line Performance and Strategies Outsourcing revenue was driven TBR IGS SERVICE LINE REVENUE (IN $ BILLIONS) primarily by growing backlog (~85% of 100% $930 $946 $985 $1,045 $1,020 $993 GTS Outsourcing revenue) and revenue growth from% of Externa l Revenue 75% $3,480 $3,537 $3,587 $3,713 $3,690 $3,643 $5.8 billion, up base/existing accounts (add-on $1,779 $1,772 $1,802 $1,897 $1,850 $1,840 6.2% year-to-year business). Emerging/growth markets 50% $2,073 $2,098 $2,162 $2,381 $2,218 $2,154 and stable outsourcing backlog will 25% contribute to 2011 growth. $5,454 $5,364 $5,532 $5,887 $5,795 $5,635 0% Integrated Demand in the emerging/growth 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 Est. Technology markets (up 11% on a constant GBS Outsourcing (AO) GBS Consulting & SI Services (ITS) currency basis for ITS) and improved GTS Maintenance GTS ITS SOURCE: TBR AND IBM GTS Outsourcing $2.2 billion, up signings performance will support ITS’ 7.0% year-to-year improving growth trend in 2011. Maintenance Maintenance, a strong cash generator, TBR IGS SERVICE LINE REVENUE AND PROFITABLITY $1.9 billion, up will retain its steady performance and 4.0% year-to-year support GTS’ growth. % of Externa l Revenue 16% 14% GBS’ revenue was driven by growth in 12% consulting and SI (80% of GBS’ 10% revenue and up 6.0% year-to-year) Global Business and in application outsourcing (AO, up 8% Services 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 Est. 10% year-to-year, driven by growing $4.7 billion, up GTS Pre-tax Margin* GBS Pre-tax Margin* outsourcing backlog). Business 6.8% year-to-year SOURCE: TBR AND IBM analytics revenue grew 30% year-to- * GTS Pre-tax Income as a % of total GTS and GBS Pre-tax Income as a % of total GBS year, as IBM continued to invest in expansion.15 IGS 1Q11 | Professional Services Business Quarterly ©2011 Technology Business Research, Inc.
  16. Financial Model Strategy: Expenses TBRIGS’ higher-value offerings, productivity initiatives and focus on deliveryexcellence will continue to generate operating margin expansionExpense Performance and Strategies IGS OPERATING EXPENSES AS A PERCENTAGE OF 1Q11 Operating Expenses: $2.75 billionTBR EXTERNAL REVENUE While IGS’ cost of services as a percentage of 25.0% Cost of revenue rose 20 basis points year-to-year to Services, 20.0% 5.5% 68.3%, higher leverage of lower-cost Gross 15.0% 2.9% 2.4% 2.6% 2.6% 4.3% 4.3% resources and focus on efficient delivery will Profit 10.0% help improve cost structure. 15.3% 16.2% 14.3% 14.8% 14.0% 14.5% 14.5% 5.0% • GTS’ operating margin was dragged down 0.0% by workforce rebalancing charges in both 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 Est. 1Q11 and 1Q10; however, the metric was G&A Expense Sales and Marketing Expense positively influenced by the operational SOURCE: IBM AND TBR ESTIMATES improvement levers being implemented across the GTS business. IGS GROSS AND OPERATING PROFIT • GBS’ operating margin was positively TBR AND PROJECTIONS Opex affected by improved utilization and 40% 34.6% Operating spending management and focus on 32.1% 33.2% 32.7% 31.7% 32.5% 32.5% 33.4% 30% 31.9% Margin delivery excellence. and • Key instruments that will support profit 20% 14.8% 15.2% 15.6% 14.5% 13.9% 14.4% 15.0% Outlook expansion include a focus on delivery 12.5% 10% 9.8% excellence, leverage of the Global Delivery Framework (deployed to 60% of the 0% delivery population at Global Technology 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 CY10 CY11 CY12 Gross Margin Est. Est. Est. Services, created 12% productivity Pre-tax Margin (Operating Margin) improvement in one year) and globally NOTE: Annual gross and operating profit and projections are for calendar 2010, 2011 and 2012, respectively. Profit calculated as a percentage of IGS external revenue. SOURCE: TBR AND IBM optimized delivery at GBS (increased utilization by 100 basis points).16 IGS 1Q11 | Professional Services Business Quarterly ©2011 Technology Business Research, Inc.
  17. Go-to-Market & Services Strategies: Sales Strategy TBRIBM utilizes a three-tiered direct sales approach to manage itsaccounts and generate new business Sales Strategy & Customer Segmentation TBR Assessment Tier 1: Integrated Accounts; Top 100 Accounts IBM’s three-tiered sales structure is very efficient, • IBM’s largest accounts, where it ensures a highly as it allows the company to approach a wide integrated experience with dedicated IBM resources. range of clients through multiple sales channels, • Vertical-specific global sales team works with Managing regardless of the client’s business size and industry focus. Account Director; Brand Category Leader assists Managing Account Director with proposals. • Includes the top +/-100 multinational accounts (more than $20 million in IBM revenue). Tier 1 Tier 2: Industry-Aligned Accounts Top ~100 • Industry-specific and likely to have shared IBM resources. Accounts • Includes the next +/-1,400 accounts, clustering together 1 to 10 clients from the same industry. Tier 2 Tier 3: Medium Accounts; Territory Specific ~1,400 Accounts • Territory-specific accounts that leverage business partners Aligned by Industry and regional ISVs. • Large regional players with annual revenue up to $200 million. Tier 3 • Includes 15,000 (growth) focus accounts, 25,000 40k Direct + 120k+ Indirect prospects and 120,000+ SMB targets; served by partners. Aligned by Geo/Territory • Web-enabled sales orders and support play a key role when assisting clients in this category. SOURCE: IBM AND TBR ESTIMATES17 IGS 1Q11 | Professional Services Business Quarterly ©2011 Technology Business Research, Inc.
  18. Go-to-Market & Services Strategies: Service Line Deep Dive TBRWith its business mix, IGS is able to target a wide range of clients andachieve account growth along the services continuum IGS’ Service Line Deep Dive TBR Assessment: • While outsourcing dominates in revenue contribution IGS REPORTED 1Q11 SERVICE LINE DEEP DIVE for IGS (~60% in 1Q11), IGS overall has a well-balanced business mix. Service offerings that combine vertical AO, 7.0% expertise with high-value transformational offerings, GBS Revenue, implementation and cost-optimization capabilities are 32.3% C&SI, 25.3% augmented by IBM’s software and hardware capabilities. BPO, 4.1% Service Lines Deep Dive Strategies: Maintenance, 12.7% • C&SI: Shift to higher-value offerings and grow asset- based offerings to complement portfolio and support GTS Revenue, growth. Gain traction in high-growth areas such as 67.7% ITO, 50.9% cloud C&SI and analytics consulting. • ITO: Extend asset-based offerings to complement portfolio and support growth. Benefit from new models such as cloud computing. • BPO: Grow Global Process Services business (i.e., BPO) faster than the market through horizontal offerings, industry-specific offerings and platforms, coupled with SOURCE: IBM AND TBR ESTIMATES forward-looking insights generated through analytics. • AO: Integrate AO services with C&SI, GTS (outsourcing and maintenance) and with IBM software. Provide industry-specific offerings and emphasize innovation of solutions and delivery through use of IBM assets.18 IGS 1Q11 | Professional Services Business Quarterly ©2011 Technology Business Research, Inc.
  19. Go-to-Market & Product Strategies TBRIBM’s growing backlog will support outsourcing revenue growth, whiledecline in transactional signings may slow consulting and SI growthServices Contract Signings TBR IGS CONTRACT SIGNINGS• While demand in the IT services market is $25 stabilizing as previously challenged areas such as $20 consulting and SI rebound, IBM could not repeat (In $ Billions) the record total signings level achieved in 4Q10. $15 $14.1 The largest shift was in outsourcing, which did not $10 $6.5 $6.5 $5.6 $4.7 get as many large deals as in 4Q10. $5 $8.0 $5.8 $5.8 $5.4 $5.8• Outsourcing/long-term signings (GTS outsourcing, $0 GBS app. outsourcing) are uneven in nature and are 1Q10 2Q10 3Q10 4Q10 1Q11 not a direct indicator of revenue performance. As Outsourcing/Long-term (GTS outsourcing, GBS outsourcing (AO)) Transactional/Short-term (GTS ITS, GBS Consulting & SI) such, IBM is using backlog to predict outsourcing SOURCE: TBR AND IBM revenue. Backlog comprises ~85% of outsourcing revenue versus base account growth and new signings, which make up the balance of 15%. Key 1Q11 Customer Wins Outsourcing backlog rose 4.4% year-to-year in Company TBR Assessment 1Q11 and will likely grow in a similar fashion in the near term, positively affecting outsourcing revenue. Caparo Provide SAP ERP implementation and• Transactional signings/short-term signings (GTS ITS, India datacenter infrastructure outsourcing, 10 years including managed services. This deal GBS consulting and SI) fell 1% year-to-year, spurred showcases IBM’s ability to attract clients in by challenges in the public sector. Transactional growth markets, which will help it further signings have a strong correlation with near-term revenue performance. The 1Q11 decline leads us to diversify revenue. believe there will be a temporary growth slowdown Hartford Transform the client’s IT infrastructure in transactional service (e.g., consulting and SI), but Financial through transitioning to IBM’s Smart Business it will not majorly influence total services revenue Services Desktop Cloud. Cloud computing is one of the (e.g., consulting and SI accounted for 25% of U.S. four growth pillars for IBM through 2015 and revenue in 1Q11). 5 years such deals will become more common.19 IGS 1Q11 | Professional Services Business Quarterly ©2011 Technology Business Research, Inc.
  20. Go-to-Market & Services Strategies: Pricing TBRPricing is stabilizing and slowly improving, allowing IGS to expandits revenue in the long term Pricing Environment & Strategies • IGS’ market and pricing environment remains TBR U.S. GOVERNMENT HOURLY RATES competitive. TBR believes prices are now more LABOR CATEGORY 10/09 - 09/10 10/10 - 09/11 % GROWTH stable across a broader share of IGS’ business and Project Executive Functional Specialist/Subject $338 $348 3.0% geographies, allowing the organization to sustain its Matter Expert $292 $301 3.1% growth trajectory. Director $239 $246 2.9% Senior Manager $193 $199 3.1% • As the economic environment stabilizes across the Manager $159 $164 3.1% globe, TBR believes IGS is seeing pricing stability in Program Support $156 $161 3.2% Consultant III $126 $130 3.2% the Americas, APAC and some countries in Europe Consultant II $102 $105 2.9% (e.g., Germany, the Nordics). In such regions, we Consultant I $79 $81 2.5% believe IGS is also able to test and push slight price Project Assistant $71 $73 2.8% increases with clients that are broadening their IT Administrative Support $53 $55 3.8% investments. Interviewer $37 $38 2.7% NOTE: RATES INCLUDE INDUSTRIAL FUNDING FEE (IFF) • At the same time, TBR believes pricing pressures still SOURCE: TBR AND GENERAL SERVICES ADMINISTRATION exist in regions of Europe that lag in economic recovery and have tight public sector spending (e.g., the Netherlands, the U.K., Spain).The table above provides hourly pricing rates for IGS from a Mission OrientedBusiness Integrated Services contract with the U.S. government’s General • TBR expects IGS to experience moderate pricingServices Administration. The contract period is from October 1997 throughSeptember 2017 and covers such services as consulting, facilitation, survey and traction through 2011, albeit at an uneven paceprivatization support and documentation. among its primary markets.20 IGS 1Q11 | Professional Services Business Quarterly ©2011 Technology Business Research, Inc.
  21. Go-to-Market & Services Strategies: Verticals TBR While the public sector may experience pockets of uncertainty, IGS will see positive trends in most of its verticals as demand improves Vertical Performance and Strategies We believe IGS is seeing expansion in financial services as demand grows in both outsourcing and Financial Services transactional service areas with specific strength in the majorTBR IGS VERTICAL REVENUE markets (e.g., North America, Europe). $16.0 $0.40 $0.20 $0.25External Revenue in $ Thousands $0.28 $0.36 $0.20 $14.0 $1.36 $1.37 $1.51 $1.46 $1.44 • Pockets of uncertainty in the public $1.41 $12.0 $1.40 $1.44 $1.55 $1.63 $1.44 $1.46 sector may cause a temporary $2.09 $2.06 $2.04 $10.0 $2.08 $2.12 $1.97 slowdown in growth in the vertical $8.0 $2.34 $2.17 $2.18 $2.13 $2.19 $2.22 on the transactional side of the $6.0 $2.58 $2.55 $2.45 $4.0 $2.33 $2.35 $2.42 business (ITS, consulting & SI). $2.0 $4.02 $4.05 $4.22 $4.52 $4.53 $4.49 • Healthcare will continue to see $0.0 Public Sector & traction as clients around the 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 Est. Healthcare globe invest in IT modernization Other Communications projects. IBM is able to provide a Distribution Industrial complete stack of services, Public Sector General Business (SMB) software and hardware, which inSOURCE: TBR ESTIMATES. many cases attracts healthcare clients investing in infrastructure changes. Communications, The three verticals supported Distribution, revenue growth for IGS as global General business demand stabilized. (SMB) 21 IGS 1Q11 | Professional Services Business Quarterly ©2011 Technology Business Research, Inc.
  22. Alliance & Acquisition Strategies TBRIBM will continue to purchase companies with intellectual property tohelp drive growth across its key business segments (services, softwareand hardware) Acquisition Assessment Recent Acquisitions With $6.5 billion spent on 17 acquisitions during 2010, Tririga Inc. IBM has proven its strong ability to successfully IBM acquired Tririga Inc., a privately held real estate integrate companies that help it expand its higher- and facilities management software company. The value offerings and capabilities and differentiate from acquisition will help IBM speed up its Smarter Buildings its competitors. Though many of the acquisitions are in initiative. Tririga will also help IBM gain traction with software (e.g., the majority of acquisitions in analytics hospitals, public sector and life sciences organizations, in 2010), they present new service opportunities that and insurance providers, and help them improve real benefit IGS. estate performance and cost. IBM/IGS Acquisition Strategy • IBM looks for companies possessing intellectual property and high-growth/margin opportunities to support the company’s focus on shifting its business and top- and bottom-line growth. • IBM plans to spend $20 billion on acquisitions through 2015, or $4 billion per year, focusing on the software and services segment. • A key driving force behind each of the company’s acquisitions is to help improve EPS in the long run; IBM’s goal is to nearly double EPS in the next four years from $11.67 in 2010 to at least $20 in 2015.22 IGS 1Q11 | Professional Services Business Quarterly ©2011 Technology Business Research, Inc.
  23. Alliance & Acquisition Strategies TBRIGS continues to utilize strategic alliances to provide customerswith a complete portfolio of services and solutions Alliance Assessment Recent Alliances • IBM/IGS leverages alliances to offer customers a full California Department of Transportation (Caltrans) complement of services, software and hardware and and California Center for Innovative Transportation to strengthen its competitive position in the market. (CCIT) at the University of California, Berkley • IGS has a well-established network of alliance IBM will collaborate with Caltrans and CCIT to partners that allows it to provide customers with a develop a transportation solution which will allow complete portfolio of services and solutions, while commuters to avoid congestion and enable local also allowing IBM to be technology-agnostic if a client transportation authorities to understand, predict and so desires. Alliances provide IGS with new sales handle traffic. This alliance showcases IBM’s strong channels, incremental revenue streams and access to analytics capabilities and ability to embed analytics emerging technology. into its Smarter Planet initiative and create innovative high-value solutions. IGS Alliance Strategy Nuance Communications, Inc. • IBM’s leverages alliances in hardware, software and IBM and Nuance Communications will explore, services to offer a full spectrum of solutions for develop and commercialize the advanced analytic clients and to enhance the company’s market capabilities of the Watson computing system. This will competitiveness. allow IBM to extend its value proposition to • IBM also works with leading research institutes, healthcare clients. university programs and international governments to Cable & Wireless Worldwide (C&W Worldwide) develop innovative solutions and industry and IBM will collaborate with C&W Worldwide on a cloud- functional thought leadership. Research and thought based data and communications solutions to support leadership initiatives help the company develop and smart energy meter rollout in the U.K. The alliance shape its go-to-market strategies according to market will help IBM expand its Smarter Energy initiative in trends and client demand. the U.K.23 IGS 1Q11 | Professional Services Business Quarterly ©2011 Technology Business Research, Inc.
  24. Geographic Analysis TBRWhile experiencing growth in emerging markets, IGS capitalized onstabilizing economic conditions in its major markets Geographic Revenue Strategies TBR IGS REVENUE AND YtY GROWTH BY GEOGRAPHY • North America is seeing a stable market environment with GBS growing 6% year-to-year $16.0 20.0% on a constant currency basis. We believe the Revenue Growth Year-to-Year External Revenue in $ Billions $14.0 $12.0 10.0% stable market environment and the return of $10.0 discretionary spending will drive consulting & SI $8.0 0.0% growth in the region. $6.0 $4.0 -10.0% • In Europe, slow, uneven economic recovery and $2.0 tight public spending remain, but some local $0.0 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 -20.0% Major economies are growing (e.g., Germany, the Asia Pacific EMEA Markets Nordics, France) and clients are investing in IT Americas Americas YtY Growth projects. EMEA YtY Growth APAC YtY Growth SOURCE: TBR ESTIMATES. • Japan may face challenges due to the natural disasters, but the impact on total services revenue will be relatively small. While the bulk of TBR IGS SEQUENTIAL GROWTH BY GEOGRAPHY IBM’s business in Japan (11% of IBM revenue) is 10% services-related, the business is largely annuity-Growth Sequentially based, which will not have near-term revenue External Revenue 5% impact. 0% We expect the Growth Markets to continue to see -5% expansion in outsourcing, especially in Strategic -10% Growth Outsourcing (i.e., infrastructure outsourcing). In 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 Markets the Growth Markets, outsourcing services grew Est. Americas EMEA APAC 12% year-to-year in 1Q11, driven by 250% year-to- SOURCE: TBR ESTIMATES year signings growth in the prior quarter. 24 IGS 1Q11 | Professional Services Business Quarterly ©2011 Technology Business Research, Inc.
  25. Resource Management Strategy: Headcount TBRIGS continues to focus on expanding its global presence andreach, making investments in emerging markets Headcount Strategies & Investments IBM Headcount Geo Distribution • IBM/IGS remains a globally integrated enterprise (operations and functions can be located anywhere in the world) with a strong emphasis on use of lower-cost Total headcount 249,000 in 1Q11 locations for service delivery to support profitability. • IBM GTS is implementing a Global Delivery Framework and standardizing and automating delivery processes to ~38% of people improve efficiency and productivity. are in North ~12% of people America are in EMEA • IBM GBS uses a globally optimized service delivery and assets to drive productivity and operational excellence, positively affecting utilization and margins. • IBM emphasizes training, professional and career ~43% of people development to attract and retain talent. are in APAC • As part of its emerging markets growth initiative, IBM ~7% of people are opened its thirtieth branch office in China and opened an in South America Innovation Center in Mexico focused on banking, communications, healthcare, retail and government.SOURCE: TBR ESTIMATES.25 IGS 1Q11 | Professional Services Business Quarterly ©2011 Technology Business Research, Inc.
  26. Resource Management Strategy: Efficiency & Org. Changes TBRIGS will encounter competitors as it hires employees to addressincreasing demand for IT services TBR IGS Efficiency Metrics (In $) Resource Management Changes 1Q10 1Q11 • According to TBR estimates, IBM’s services headcount Revenue per Employee $ 236,951 $ 235,482 ↓ increased 6.0% year-to-year to 249,000 in 1Q11. TBR believes the company is gradually hiring across key Operating Income per Employee $ 33,549 $ 35,375 ↑ regions and lower-cost locations as demand improves. Utilization 84.0% 86.2% ↑ • While IBM is driving productivity initiatives to support Turnover 13.5% 15.2% ↑ profitability improvements in the next four years, TBR believes the company will limit hiring onshore and in some cases decrease headcount (the company tookEfficiency Performance workforce rebalancing charges, largely in Europe,• IBM GBS has been working on improving its utilization during 1Q11). In 1Q11, IBM reportedly cut ~200 during the past several quarters as a tool to improve its services people (in TBR estimates) in North America, operating margin. TBR believes this had a positive mostly in the U.S. effect on IGS’ total utilization levels, which we estimate IGS SERVICES HEADCOUNT at 86.2% in 1Q11. TBR Total headcount: 249000 (+6.0% YTY)• Attrition levels in the IT services industry are rising due 250,000 to the active hiring efforts of vendors that are adding 200,000 talent to address growing demand for IT services. TBR 114,000 Total Headcount 120,000 believes IGS’ attrition levels increased in 1Q11, largely 150,000 Onshore driven by lower-cost locations. Offshore 100,000• Operating income per employee increased on a year-to 135,000 year basis due to increased use of lower-cost resources 50,000 115,000 for service delivery, focus on productivity and 0 efficiency. 1Q10 1Q11 Calendar Quarter SOURCE: TBR ESTIMATES26 IGS 1Q11 | Professional Services Business Quarterly ©2011 Technology Business Research, Inc.
  27. Income Statement TBR TBR IGS PRO FORMA INCOME STATEMENT (IN $ MILLIONS) CALENDAR QUARTER 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 Est. Global Technology Services Internal Revenue $ 320 $ 332 $ 362 $ 299 $ 307 $ 315 Global Technology Services External Revenue $ 9,306 $ 9,234 $ 9,496 $ 10,165 $ 9,863 $ 9,629 Global Business Services Internal Revenue $ 203 $ 197 $ 199 $ 199 $ 200 $ 199 Global Business Services External Revenue $ 4,410 $ 4,483 $ 4,572 $ 4,758 $ 4,710 $ 4,636 Total IGS Internal Revenue $ 523 $ 529 $ 561 $ 498 $ 507 $ 514 Total IGS External Revenue $ 13,716 $ 13,717 $ 14,068 $ 14,923 $ 14,573 $ 14,266 Total IGS Revenue (Internal + External) $ 14,239 $ 14,246 $ 14,629 $ 15,421 $ 15,080 $ 14,780 Cost of Services $ 9,334 $ 9,317 $ 9,397 $ 10,049 $ 9,949 $ 9,629 Gross Profit $ 4,382 $ 4,400 $ 4,671 $ 4,874 $ 4,624 $ 4,636 Global Technology Services $ 3,183 $ 3,176 $ 3,349 $ 3,527 $ 3,334 $ 3,322 Global Business Services $ 1,200 $ 1,224 $ 1,322 $ 1,347 $ 1,291 $ 1,314 Operating Expenses $ 2,980 $ 2,295 $ 2,452 $ 2,471 $ 2,746 $ 2,496 Total IGS Operating Income (Pre-tax Income) $ 1,402 $ 2,105 $ 2,219 $ 2,403 $ 1,878 $ 2,140 Global Technology Services Pre-tax Income $ 957 $ 1,422 $ 1,524 $ 1,657 $ 1,238 $ 1,355 Global Business Services Pre-tax Income $ 445 $ 683 $ 695 $ 746 $ 640 $ 785 AS A PERCENTAGE OF TOTAL EXTERNAL IGS REVENUE Global Technology Services External Revenue 67.8% 67.3% 67.5% 68.1% 67.7% 67.5% Global Business Services External Revenue 32.2% 32.7% 32.5% 31.9% 32.3% 32.5% Total IGS External Revenue 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Cost of Sales 68.1% 67.9% 66.8% 67.3% 68.3% 67.5% Gross Margin 31.9% 32.1% 33.2% 32.7% 31.7% 32.5% Global Technology Services 34.2% 34.4% 35.3% 34.7% 33.8% 34.5% Global Business Services 27.2% 27.3% 28.9% 28.3% 27.4% 28.3% Operating Expenses 21.7% 16.7% 17.4% 16.6% 18.8% 17.5% Total IGS Operating Income (as % of IGS External Revenue) 10.2% 15.3% 15.8% 16.1% 12.9% 15.0% Global Technology Services Pre-tax Income 7.0% 10.4% 10.8% 11.1% 8.5% 9.5% Global Business Services Pre-tax Income 3.2% 5.0% 4.9% 5.0% 4.4% 5.5% Total IGS Operating Income (as % of IGS Revenue (Internal + External) 9.8% 14.8% 15.2% 15.6% 12.5% 14.5% GTS Pre-tax Income as a % of total GTS* 9.9% 14.9% 15.5% 15.8% 12.2% 13.6% GBS Pre-tax Income as a % of total GBS* 9.7% 14.6% 14.6% 15.0% 13.0% 16.2% YEAR-TO-YEAR CHANGE Global Technology Services External Revenue 6.3% 1.4% 0.7% 1.1% 6.0% 4.3% Global Business Services External Revenue 0.3% 3.3% 5.4% 3.9% 6.8% 3.4% Total IGS External Revenue 4.3% 2.0% 2.1% 2.0% 6.2% 4.0% Cost of Services 3.5% 2.4% 2.4% 4.2% 6.6% 3.4% Gross Profit 6.0% 1.3% 1.7% -2.3% 5.5% 5.4% Global Technology Services 7.2% 0.3% 0.0% -2.0% 4.7% 4.6% Global Business Services 2.9% 3.9% 6.2% -3.0% 7.6% 7.4% Operating Expenses 18.8% -1.6% -0.5% -7.3% -7.8% 8.8% Total IGS Operating Income (Pre-tax Income) -13.7% 4.6% 4.2% 3.5% 33.9% 1.7% Global Technology Services Pre-tax Income -13.3% 1.2% 3.6% 6.5% 29.4% -4.7% Global Business Services Pre-tax Income -14.6% 12.3% 5.5% -2.6% 43.8% 14.9% * GTS and GBS pre-tax margins are calculated based on their respective internal and external revenue as reported by IBM. SOURCE: IBM AND TBR27 IGS 1Q11 | Professional Services Business Quarterly ©2011 Technology Business Research, Inc.
  28. Income Statement TBR IBM CORP. Consolidated Statement of Income (i n Thous a nds Except per Sha re Da ta ) TBR Ma rch 10 June10 Sept. 10 Dec. 10 Ma rch 11 June 11 FISCAL/CALENDAR QUARTER 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 Est. Net Sales $ 22,857,000 $ 23,724,000 $ 24,271,000 $ 29,019,000 $ 24,607,000 $ 25,200,000 Cost of Sales 12,881,000 12,915,000 13,270,000 14,792,000 13,749,000 13,608,000 Gross Profit 9,976,000 10,809,000 11,001,000 14,227,000 10,858,000 11,592,000 SG&A 5,677,000 5,061,000 5,149,000 5,951,000 5,826,000 5,897,000 R&D 1,509,000 1,475,000 1,464,000 1,578,000 1,587,000 1,600,000 IP and Custom Development Income (261,000) (297,000) (278,000) (318,000) (262,000) (289,000) Operating Income 3,051,000 4,570,000 4,666,000 7,016,000 3,707,000 4,384,000 Other (Income) and Expenses (545,000) (95,000) (106,000) (42,000) (202,000) (111,000) Interest Expense 82,000 90,000 95,000 102,000 93,000 95,000 EBITD 3,514,000 4,575,000 4,677,000 6,956,000 3,816,000 4,400,000 Income Taxes 914,000 1,190,000 1,088,000 1,698,000 954,000 1,095,000 Net Income $ 2,600,000 $ 3,385,000 $ 3,589,000 $ 5,258,000 $ 2,862,000 $ 3,305,000 Net Income Per Share of Common Stock $ 2.00 $ 2.61 $ 2.82 $ 4.18 $ 2.34 N/A Common Shares Outstanding 1,301,200,000 1,296,700,000 1,272,800,000 1,258,400,000 1,222,200,000 N/A AS A PERCENTAGE OF REVENUE Net Sales 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Cost of Sales 56.4% 54.4% 54.7% 51.0% 55.9% 54.0% Gross Margin 43.6% 45.6% 45.3% 49.0% 44.1% 46.0% SG&A 24.8% 21.3% 21.2% 20.5% 23.7% 23.4% R&D 6.6% 6.2% 6.0% 5.4% 6.4% 6.3% Operating Margin 13.3% 19.3% 19.2% 24.2% 15.1% 17.4% Other, Net -2.4% -0.4% -0.4% -0.1% -0.8% -0.4% EBITD 15.4% 19.3% 19.3% 24.0% 15.5% 17.5% Income Taxes 4.0% 5.0% 4.5% 5.9% 3.9% 4.3% Net Margin 11.4% 14.3% 14.8% 18.1% 11.6% 13.1% YEAR-TO-YEAR CHANGE Net Sales 5.3% 2.0% 3.0% 6.6% 7.7% 6.2% Cost of Sales 4.9% 1.9% 2.6% 5.0% 6.7% 5.4% Gross Profit 5.8% 2.2% 3.5% 8.2% 8.8% 7.2% SG&A 7.8% -1.1% 2.7% 7.0% 2.6% 16.5% R&D 2.0% 2.9% 1.2% 8.0% 5.2% 8.5% Operating Income 3.2% 5.4% 4.6% 9.0% 21.5% -4.1% Other, Net -177.2% -106.8% -112.4% 5.3% 76.5% -220.0% EBITD 12.6% 7.4% 7.0% 9.0% 8.6% -3.8% Income Taxes 10.5% 2.7% -6.1% 8.3% 4.4% -8.0% Net Income 13.3% 9.1% 11.7% 9.3% 10.1% -2.4% SOURCE: IBM28 IGS 1Q11 | Professional Services Business Quarterly ©2011 Technology Business Research, Inc.
  29. Balance Sheet TBR IBM CORP. Consolidated Balance Sheets TBR (i n $ Thous a nds ) Ma rch 10 June10 Sept. 10 Dec. 10 Ma rch 11 FISCAL/CALENDAR QUARTER 1Q10 2Q10 3Q10 4Q10 1Q11 ASSETS Current Assets Cash & Equivalents $ 12,472,000 $ 10,325,000 $ 9,859,000 $ 10,661,000 $ 12,763,000 Marketable Securities 1,505,000 1,916,000 1,227,000 990,000 482,000 Accounts Receivable 10,428,000 10,191,000 10,904,000 11,968,000 11,293,000 Inventory 2,524,000 2,595,000 2,629,000 2,450,000 2,549,000 Short-term Financing Receivables 13,083,000 13,301,000 13,592,000 16,257,000 14,365,000 Deferred Taxes 1,565,000 1,444,000 1,596,000 1,564,000 1,695,000 Prepaid Expenses and Other 4,121,000 5,124,000 4,661,000 4,226,000 4,376,000 Total Current Assets 45,698,000 44,896,000 44,468,000 48,116,000 47,523,000 Property, Plant, Equip. (Net of Dep.) 13,841,000 13,534,000 14,009,000 14,096,000 14,208,000 Long-term Financing Receivables 9,542,000 9,185,000 9,448,000 10,548,000 10,254,000 Prepaid Pension Assets 3,289,000 3,575,000 4,379,000 3,068,000 3,788,000 Intangible Assets 2,618,000 2,526,000 3,048,000 3,488,000 3,324,000 Goodwill 20,889,000 20,544,000 22,703,000 25,136,000 25,408,000 Other, Net 9,331,000 9,160,000 9,119,000 8,998,000 8,456,000 Total Assets $ 105,208,000 $ 103,420,000 $ 107,174,000 $ 113,450,000 $ 112,961,000 LIABILITIES & EQUITY Current Liabilities Accounts Payable $ 26,787,000 $ 26,465,000 $ 26,979,000 $ 29,568,000 $ 29,349,000 Short-term Debt 5,014,000 5,633,000 5,556,000 6,778,000 8,508,000 Income Taxes Payable 2,775,000 2,895,000 2,908,000 4,216,000 2,531,000 Total Current Liabilities 34,576,000 34,993,000 35,443,000 40,562,000 40,388,000 LT Debt, Net of Current 21,305,000 21,017,000 21,899,000 21,846,000 21,749,000 Retirement Obligations 15,216,000 14,598,000 15,145,000 15,978,000 15,995,000 Other Non-current Liabilities 11,962,000 11,636,000 12,329,000 11,892,000 12,054,000 Total Liabilities $ 83,059,000 $ 82,244,000 $ 84,816,000 $ 90,278,000 $ 90,186,000 Common Stock & PIC 42,665,000 43,522,000 44,328,000 45,418,000 46,278,000 Retained Earnings 82,783,000 85,323,000 88,095,000 92,532,000 94,590,000 Translation and Other Adj. (103,299,000) (107,669,000) (110,065,000) (114,778,000) (118,093,000) Total Stockholders Equity 22,149,000 21,176,000 22,358,000 23,172,000 22,775,000 Total Liabilities & Equity $ 105,208,000 $ 103,420,000 $ 107,174,000 $ 113,450,000 $ 112,961,000 FINANCIAL RATIOS Days Sales Outstanding 41.06 38.66 40.43 37.12 41.30 Turns on Inventory 36.44 37.08 37.17 45.71 39.38 Days Inventory Outstanding 10.02 9.84 9.82 7.99 9.27 Fixed Asset Turnover 6.92 7.11 7.12 7.11 7.18 Days Cash Outstanding 97.66 85.30 75.19 70.89 86.70 Total Asset Turnover 0.85 0.91 0.92 1.05 0.87 Debt/Asset Ratio 0.79 0.80 0.79 0.80 0.80 Current Ratio 1.32 1.28 1.25 1.19 1.18 Return on Assets 13.1% 13.3% 13.6% 13.8% 13.9% Return on Equity 74.2% 70.0% 67.3% 66.4% 67.6% Revenue/Employee ($ Thousands) $ 243,657 $ 243,776 $ 244,242 $ 246,923 $ 248,470 Number of Employees 399,400 402,000 405,500 410,950 417,500 SOURCE: IBM29 IGS 1Q11 | Professional Services Business Quarterly ©2011 Technology Business Research, Inc.
  30. Appendix – Financial Models TBR IGS REVENUE BREAKDOWN BY BUSINESS UNIT (IN $ MILLIONS) TBR CALENDAR QUARTER 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 Est. Global Technology Services External Revenue $ 9,306 $ 9,234 $ 9,496 $ 10,165 $ 9,863 $ 9,629 Outsourcing $ 5,454 $ 5,364 $ 5,532 $ 5,887 $ 5,795 $ 5,635 Integrated Technology Services $ 2,073 $ 2,098 $ 2,162 $ 2,381 $ 2,218 $ 2,154 Maintenance $ 1,779 $ 1,772 $ 1,802 $ 1,897 $ 1,850 $ 1,840 Global Business Services External Revenue $ 4,410 $ 4,483 $ 4,572 $ 4,758 $ 4,710 $ 4,636 Outsourcing (app. outsourcing) $ 930 $ 946 $ 985 $ 1,045 $ 1,020 $ 993 Consulting & SI $ 3,480 $ 3,537 $ 3,587 $ 3,713 $ 3,690 $ 3,643 Total IGS External Revenue $ 13,716 $ 13,717 $ 14,068 $ 14,923 $ 14,573 $ 14,266 AS A PERCENTAGE OF EXTERNAL IGS REVENUE Global Technology Services External Revenue 67.8% 67.3% 67.5% 68.1% 67.7% 67.5% Outsourcing 39.8% 39.1% 39.3% 39.5% 39.8% 39.5% Integrated Technology Services 15.1% 15.3% 15.4% 16.0% 15.2% 15.1% Maintenance 13.0% 12.9% 12.8% 12.7% 12.7% 12.9% Global Business Services External Revenue 32.2% 32.7% 32.5% 31.9% 32.3% 32.5% Outsourcing (app. outsourcing) 6.8% 6.9% 7.0% 7.0% 7.0% 7.0% Consulting & SI 25.4% 25.8% 25.5% 24.9% 25.3% 25.5% YEAR-TO-YEAR CHANGE Global Technology Services External Revenue 6.3% 1.4% 0.7% 1.1% 6.0% 4.3% Outsourcing 7.7% 1.6% 1.2% 1.2% 6.2% 5.1% Integrated Technology Services 1.9% -1.8% -1.9% -0.6% 7.0% 2.7% Maintenance 7.4% 4.6% 2.1% 3.0% 4.0% 3.9% Global Business Services External Revenue 0.3% 3.3% 5.4% 3.9% 6.8% 3.4% Outsourcing (app. outsourcing) N/A N/A N/A N/A 9.7% 4.9% Consulting & SI N/A N/A N/A N/A 6.0% 3.0% IGS External Revenue 4.3% 2.0% 2.1% 2.0% 6.2% 4.0% SOURCE: IBM AND TBR ESTIMATES30 IGS 1Q11 | Professional Services Business Quarterly ©2011 Technology Business Research, Inc.
  31. Appendix – Financial Models TBR TBR IGS GEO REVENUE BREAKDOWN - IN $ MILLIONS CALENDAR QUARTER 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 Est. FISCAL QUARTER 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 Est. Total Revenue $ 13,716 $ 13,717 $ 14,068 $ 14,923 $ 14,573 $ 14,266 AMERICAS Revenue $ 6,059 $ 6,216 $ 6,241 $ 6,710 $ 6,543 $ 6,491 % of Total Revenue 44.2% 45.3% 44.4% 45.0% 44.9% 45.5% EMEA Revenue $ 4,710 $ 4,384 $ 4,519 $ 4,967 $ 4,809 $ 4,465 % of Total Revenue 34.3% 32.0% 32.1% 33.3% 33.0% 31.3% ASIA PACIFIC Revenue $ 2,947 $ 3,117 $ 3,308 $ 3,246 $ 3,221 $ 3,310 % of Total Revenue 21.5% 22.7% 23.5% 21.8% 22.1% 23.2% YEAR-TO-YEAR CHANGE Americas 1.8% 3.5% 3.0% 4.2% 8.0% 4.4% EMEA 4.9% -5.0% -6.0% -3.0% 2.1% 1.9% Asia Pacific 8.9% 10.3% 13.9% 5.6% 9.3% 6.2% SEQUENTIAL CHANGE Americas -5.9% 2.6% 0.4% 7.5% -2.5% -0.8% EMEA -8.0% -6.9% 3.1% 9.9% -3.2% -7.2% Asia Pacific -4.1% 5.8% 6.1% -1.9% -0.8% 2.8% SOURCE: TBR ESTIMATES31 IGS 1Q11 | Professional Services Business Quarterly ©2011 Technology Business Research, Inc.
  32. Appendix – Financial Models TBR TBR IGS REVENUE BREAKDOWN - BY INDUSTRY (IN $ BILLIONS) CALENDAR QUARTER 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 Est. Financial Services $ 4.02 $ 4.05 $ 4.22 $ 4.52 $ 4.53 $ 4.49 Public Sector $ 2.13 $ 2.19 $ 2.22 $ 2.34 $ 2.17 $ 2.18 Industrial $ 2.08 $ 2.12 $ 1.97 $ 2.09 $ 2.06 $ 2.04 Distribution $ 1.40 $ 1.44 $ 1.55 $ 1.63 $ 1.44 $ 1.46 Communications $ 1.36 $ 1.37 $ 1.41 $ 1.51 $ 1.46 $ 1.44 General Business (SMB) $ 2.33 $ 2.35 $ 2.42 $ 2.58 $ 2.55 $ 2.45 Other $ 0.40 $ 0.20 $ 0.28 $ 0.25 $ 0.36 $ 0.20 All Sectors $ 13.72 $ 13.72 $ 14.07 $ 14.92 $ 14.57 $ 14.27 AS A PERCENTAGE OF REVENUE Financial Services 29.3% 29.5% 30.0% 30.3% 31.1% 31.5% Public Sector 15.5% 16.0% 15.8% 15.7% 14.9% 15.3% Industrial 15.2% 15.4% 14.0% 14.0% 14.2% 14.3% Distribution 10.2% 10.5% 11.0% 10.9% 9.9% 10.2% Communications 9.9% 10.0% 10.0% 10.1% 10.0% 10.1% General Business (SMB) 17.0% 17.1% 17.2% 17.3% 17.5% 17.2% Other 2.9% 1.5% 2.0% 1.7% 2.5% 1.4% YEAR-TO-YEAR GROWTH Financial Services 1.9% 0.3% 5.7% 5.8% 12.8% 11.1% Public Sector 14.7% 14.9% 7.6% 6.8% 2.1% -0.6% Industrial 32.1% 31.1% 7.5% 2.0% -1.1% -3.6% Distribution 3.3% 2.0% 6.0% 7.9% 3.1% 1.0% Communications 2.2% 0.0% -0.8% 2.0% 7.3% 5.0% General Business (SMB) -9.5% -10.7% -8.5% -11.3% 9.4% 4.6% Other -22.4% -57.6% -21.4% 15.6% -10.2% -1.6% All Sectors 4.3% 2.0% 2.1% 2.0% 6.2% 4.0% SOURCE: TBR ESTIMATES32 IGS 1Q11 | Professional Services Business Quarterly ©2011 Technology Business Research, Inc.
  33. Appendix – Financial Models TBR TBR IBM GLOBAL SERVICES OPERATING EXPENSE MODEL (IN $ THOUSANDS) CALENDAR QUARTER 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 Est. FISCAL QUARTER 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 Est. IGS External Revenue $ 13,716,000 $ 13,717,000 $ 14,068,000 $ 14,923,000 $ 14,573,000 $ 14,265,680 Operating Expenses $ 2,980,018 $ 2,295,355 $ 2,452,000 $ 2,470,769 $ 2,746,234 $ 2,496,494 Sales & Marketing $ 2,221,992 $ 1,961,531 $ 2,082,064 $ 2,089,220 $ 2,113,085 $ 2,025,727 General & Administrative $ 758,026 $ 333,824 $ 369,936 $ 381,549 $ 633,149 $ 470,767 SALES & MARKETING EXPENSE BREAKOUT Sales Expense $ 1,755,374 $ 1,553,533 $ 1,644,831 $ 1,650,484 $ 1,671,450 $ 1,602,350 Marketing Spending $ 466,618 $ 407,998 $ 437,233 $ 438,736 $ 441,635 $ 423,377 Advertising $ 150,000 $ 157,920 $ 168,500 $ 185,500 $ 188,700 $ 191,250 Total Sales & Marketing Expense $ 2,221,992 $ 1,961,531 $ 2,082,064 $ 2,089,220 $ 2,113,085 $ 2,025,727 SPENDING AS A PERCENTAGE OF REVENUE Operating Expenses 21.7% 16.7% 17.4% 16.6% 18.8% 17.5% Sales & Marketing 16.2% 14.3% 14.8% 14.0% 14.5% 14.2% Sales Expense 12.8% 11.3% 11.7% 11.1% 11.5% 11.2% Marketing Spending 3.4% 3.0% 3.1% 2.9% 3.0% 3.0% Advertising 1.1% 1.2% 1.2% 1.2% 1.3% 1.3% General & Administrative 5.5% 2.4% 2.6% 2.6% 4.3% 3.3% SOURCE: TBR ESTIMATES AND IBM33 IGS 1Q11 | Professional Services Business Quarterly ©2011 Technology Business Research, Inc.
  34. Appendix – Financial Models TBR TBR IBM GLOBAL SERVICES OFFSHORE HEADCOUNT CALENDAR QUARTER 1Q10 2Q10 3Q10 4Q10 1Q11 EMPLOYEES India 72,700 75,000 80,000 83,000 85,000 Total Near/Offshore 115,000 120,000 125,000 130,000 135,000 Headcount Total Headcount 235,000 237,000 242,000 245,000 249,000 Total Headcount YtY -1.7% 0.9% 3.4% 4.7% 6.0% Growth TBR ESTIMATES SOURCE:34 IGS 1Q11 | Professional Services Business Quarterly ©2011 Technology Business Research, Inc.
  35. Appendix – Graphs TBRFinancial Strategy Graphs TBR IGS OPERATING MARGIN TBR IBM CURRENT RATIO 2.00 20.0% 14.8% 15.2% 15.6% 16.0% 12.5% 1.50 12.0% 9.8% 1.32 1.28 1.00 1.25 1.19 1.18 8.0% 0.50 4.0% 0.0% 0.00 1Q10 2Q10 3Q10 4Q10 1Q11 1Q10 2Q10 3Q10 4Q10 1Q11 IGS PSBQ AVERAGE IBM PSBQ AVERAGE SOURCE: TBR AND IBM SOURCE: TBR AND IBM TBR IBM DEBT/ASSET RATIO 1.00 0.79 0.80 0.79 0.80 0.80 0.80 0.60 0.40 0.20 0.00 1Q10 2Q10 3Q10 4Q10 1Q11 IBM PSBQ AVERAGE SOURCE: TBR AND IBM35 IGS 1Q11 | Professional Services Business Quarterly ©2011 Technology Business Research, Inc.
  36. Appendix – Graphs TBRFinancial Strategy Graphs TBR IBM RETURN ON ASSETS 16.0% 13.3% 13.6% 13.8% 13.9% 13.1% 12.0% 8.0% 4.0% 0.0% 1Q10 2Q10 3Q10 4Q10 1Q11 IBM PSBQ AVERAGE SOURCE: TBR AND IBM TBR IBM RETURN ON EQUITY 100.0% 74.2% 66.4% 67.6% 75.0% 70.0% 67.3% 50.0% 25.0% 0.0% 1Q10 2Q10 3Q10 4Q10 1Q11 IBM PSBQ AVERAGE SOURCE: TBR AND IBM36 IGS 1Q11 | Professional Services Business Quarterly ©2011 Technology Business Research, Inc.
  37. Appendix – Graphs TBRGo-to-Market GraphsTBR IGS REVENUE (IN $ BILLIONS) IGS REVENUE GROWTH TBR $20.0 $13.7 $13.7 $14.1 $14.9 $14.6 $15.0 12.0% $10.0 8.0% 6.2% 4.3% $5.0 4.0% 2.0% 2.1% 2.0% $0.0 0.0% 1Q10 2Q10 3Q10 4Q10 1Q11 1Q10 2Q10 3Q10 4Q10 1Q11 IGS PSBQ AVERAGE IGS PSBQ AVERAGESOURCE: TBR AND IBM SOURCE: TBR AND IBMTBR BACKLOG/REVENUE RATIO TBR IBM DAYS SALES OUTSTANDING 3.00 80.00 2.41 2.31 2.39 2.52 2.48 2.50 Number of Days 60.00 2.00 41.30 41.06 38.66 40.43 1.50 37.12 40.00 1.00 20.00 0.50 0.00 0.00 1Q10 2Q10 3Q10 4Q10 1Q11 1Q10 2Q10 3Q10 4Q10 1Q11 IGS PSBQ AVERAGE IBM PSBQ AVERAGESOURCE: TBR AND IBM SOURCE: TBR AND IBM37 IGS 1Q11 | Professional Services Business Quarterly ©2011 Technology Business Research, Inc.
  38. Appendix – Graphs TBRResource Management Graphs TBR GROSS MARGIN IGS OPERATING EXPENSES AS A TBR PERCENTAGE OF REVENUE 40.0% 25.0% 32.1% 33.2% 32.7% 21.7% 31.9% 31.7% 17.4% 18.8% 30.0% 20.0% 16.7% 16.6% 15.0% 20.0% 10.0% 10.0% 5.0% 0.0% 0.0% 1Q10 2Q10 3Q10 4Q10 1Q11 1Q10 2Q10 3Q10 4Q10 1Q11 IGS PSBQ AVERAGE IGS PSBQ AVERAGE SOURCE: TBR AND IBM SOURCE: TBR AND IBM IGS REVENUE PER EMPLOYEE TBR (IN $ THOUSANDS AND TTM) $280.0 $237.0 $237.6 $236.8 $235.3 $235.5 $220.0 $160.0 $100.0 1Q10 2Q10 3Q10 4Q10 1Q11 IGS PSBQ AVERAGE SOURCE: TBR AND IBM38 IGS 1Q11 | Professional Services Business Quarterly ©2011 Technology Business Research, Inc.
  39. Appendix – Graphs TBRResource Management Graphs IGS UTILIZATION RATE TBR IGS TURNOVER RATE TBR 100.0% 20.0% 84.0% 85.0% 86.0% 86.0% 86.2% 15.0% 15.4% 15.2% 13.5% 14.6% 80.0% 15.0% 60.0% 10.0% 40.0% 5.0% 20.0% 0.0% 0.0% 1Q10 2Q10 3Q10 4Q10 1Q11 1Q10 2Q10 3Q10 4Q10 1Q11 IGS PSBQ AVERAGE IGS PSBQ AVERAGE SOURCE: TBR AND IBM SOURCE: TBR AND IBM TBR IGS OPERATING INCOME PER EMPLOYEE (IN $ THOUSANDS AND TTM) $40.0 $33.5 $33.9 $34.0 $33.9 $35.4 $30.0 $20.0 $10.0 $0.0 1Q10 2Q10 3Q10 4Q10 1Q11 IGS PSBQ AVERAGE SOURCE: TBR AND IBM39 IGS 1Q11 | Professional Services Business Quarterly ©2011 Technology Business Research, Inc.
  40. Appendix – Tables TBRIBM/IGS’ Recent Acquisitions ESTIMATED ACQUISITION ACQUISITION SYNERGIES NO. OF COMPANY DATE EMPLOYEES Enhances IBM’s ability to bring intelligence into the smarter Tririga, Inc. April 2011 buildings market. Tririga is a leader in providing facility and real N/A estate management software solutions. Software and devices that route data and transactions to and BLADE Network October from servers, helping IBM better integrate networks with its N/A Technologies 2010 systems. October Extends IBM’s business analytics capabilities through OpenPages OpenPages 140 2010 software that helps identify and manage risk and compliance. Extends IBM’s business analytics initiatives through Clarity October Clarity Systems Systems’ financial governance software that helps organizations N/A 2010 automate processes for financial statement management. PSS Systems provides software for analyzing, automation and implementation of information governance policies. The October PSS Systems acquisition expands IBM’s Information Lifecycle Governance 100 2010 solutions, IBM’s storage management and Smart Archive strategy. Netezza September Extends IBM’s business analytics initiatives through Netezza’s 500 Corporation 2010 analytics and data warehousing appliance. Storwize’s data compression technology reduces storage Storwize August 2010 requirements and augments IBM’s storage and analytics N/A capabilities.40 IGS 1Q11 | Professional Services Business Quarterly ©2011 Technology Business Research, Inc.
  41. Appendix – Tables TBRIBM/IGS’ Recent Acquisitions ESTIMATED ACQUISITION ACQUISITION SYNERGIES NO. OF COMPANY DATE EMPLOYEES Strengthens IBM’s capabilities to digitize, manage and automate Datacap August 2010 information assets in paper intensive verticals (e.g., healthcare, 40 insurance, public sector and finance). Sterling Software for cross-channel commerce and integration of August 2010 2,500 Commerce customers, partners and suppliers across a range of industries. The acquisition of Unica allows IBM to increase its ability to aid Unica August 2010 organizations when predicting and analyzing customer 500 Corporation (announced) tendencies. July 2010 Data compression technology that improves storage efficiency Storwize N/A (announced) and data analytic capabilities. Security and compliance management and automation for BigFix July 2010 N/A desktops across the enterprise. Strengthens IBM’s cloud computing capabilities (cloud Cast Iron Systems May 2010 integration software, appliances and services), business process 75 and integration software portfolio. By acquiring the core operating assets of Wilshire Credit Wilshire Credit March 2010 Corporation, including the Wilshire mortgage servicing 900 Corporation platform, IBM strengthens its mortgage BPO capabilities.41 IGS 1Q11 | Professional Services Business Quarterly ©2011 Technology Business Research, Inc.
  42. Appendix – Tables TBRIBM/IGS’ Recent Acquisitions ESTIMATED ACQUISITION ACQUISITION SYNERGIES NO. OF COMPANY DATE EMPLOYEES Provider of intelligent network automation software, Intelliden February 2010 N/A extending IBM’s network management offerings. Data integrity software for information sharing among Initiate Systems January 2010 120 healthcare and government organizations. National Interest Security January 2010 Advanced analytics and IT solutions for the public sector. 1,000 Company Lombardi provides BPM software and services, complements IBMs enterprise-wide process management Lombardi January 2010 180 software, and adds integrated solutions that automate human tasks and workflows.42 IGS 1Q11 | Professional Services Business Quarterly ©2011 Technology Business Research, Inc.
  43. Appendix – Tables TBRIGS’ Portfolio of Services BUSINESS CONSULTING: IT SERVICES: Service Lines Service Lines • Business Analytics and Optimization • Business Continuity and Resiliency Services • Customer Relationship Management • End-user Services • Financial Management • Integrated Communications Services • Human Capital Management • Security Services • Strategy and Change • IT Strategy and Architecture Services • Supply Chain Management • Maintenance and Technical Support Services • Industry Expertise • Middleware Services • Midmarket Expertise • Outsourcing Services • Thought Leadership • Server Services • Site and Facilities Services • Storage and Data Services43 IGS 1Q11 | Professional Services Business Quarterly ©2011 Technology Business Research, Inc.
  44. Appendix – Tables TBRIBM/IGS’ Recent Services Announcements SERVICE/ SOLUTION DATE DESCRIPTION2Q11 The new global consulting practice will help companies improve their Consulting Services for business processes in marketing, human resources, finance and other Business Process April 2011 industry-specific processes. Services will be provided from the U.S. and Management other locations around the world. The new, secure cloud will meet the demands of businesses. The SmartIBM Smart Cloud Platform for Cloud are enterprise technologies and services for private, public and April 2011 Business hybrid clouds based on IBM hardware, software and services. IBM will offer SAP managed application services on the IBM Smart Cloud.1Q11 IBM Smarter Commerce This new service will further IBM’s leadership and investments in business March Consulting Services and analytics and optimization. The new offerings will address a multitude 2011 Software enterprise commerce activities, improving IBM’s position in the market. A free website by IBM that will improve the quality of life in cities around March the world by showing policy makers how their city is doing as compared to City Forward 2011 others. It also provides information on how to improve the qualities in which the city may be lacking. IBM provides professional services which enable companies to develop Communication Service new revenue generating services while controlling costs as they build February Provider Network advanced networks. IBM services include solutions planning, migration, 2011 Infrastructure Services architecture, design, project planning, deployment and end-to-end multi- vendor infrastructures.44 IGS 1Q11 | Professional Services Business Quarterly ©2011 Technology Business Research, Inc.
  45. Appendix – Tables TBR IBM/IGS’ Vertical Industries Telecommunication Retail Banking Automotive Government • Service Provider • Merchandising • Back-office • IBM auto mktg. sales • Social services & Strategic • Consumer Driven operations and service social security Transformation Supply Chain • Front-office • IBM auto • Customs, ports & (SPST) • On Demand optimization manufacturing border mgmt. Workplace for • Risk and productivity • Enterprise Retail compliance • PLM Integration Media & • Auto common ERP/CRM Entertainment Consumer Products Financial Markets environment • Defense/national • Production and • Integrated Market • Risk and • Embedded Systems security distribution Management compliance lifecycle management • Road Charging transformation • Consumer Driven • Trade process Financial Services SolutionsCommunications Solutions • Customer sales Supply Chain transformation Electronics Health & Life Distribution Solutions Industrial Solutions and service • CP Core Financials • FM Data • Electronics Value Sciences Public Solutions transformation & HR-SAP (Japan) Management Chain Mgmt. • Life sciences • On Demand • IBM Production transformation/ Workplace for CP Insurance Solutions pharma Energy & Utilities (Japan) • Core insurance • Electronics sales & integration • Utilities network • Insurance Front service • New compliance revitalization Travel & Transport Office • PLM agenda • Customer • On Demand • Ins. Life • Embedded Systems • Healthcare operations Workplace for T&T Transformation • Lifecycle mgmt. provider/ transformation • Customer Driven aligned clinical Supply Chain for Aerospace & Defense environment T&T • Supply Chain Aftermarket Education • PLM • Enhanced campus • SAP Full Economy communication • IBM Learning Chemical & Petroleum Alignment • Upstream Petroleum BI/ODW • IBM Learning • SAP Full Economy Alignment SIS 45 IGS 1Q11 | Professional Services Business Quarterly ©2011 Technology Business Research, Inc.
  46. Appendix – Tables TBRIBM/IGS’ Quarterly Services Signings CONTRACT CLIENT DATE DESCRIPTION YEARS VALUE Hartford Financial April Transform the client’s IT infrastructure through transitioning Services 5 N/A 2011 to IBM’s Smart Business Desktop Cloud. United StatesNational Broadband IBM will provide consulting services, integration, application March Multimillion- Network (NBN) support and software solutions related to NBN’s core 3 2011 Dollar Australia business and operational support systems. Cathay Pacific March Contract for application development, support and Airways N/A N/A 2011 maintenance. Hong Kong Caparo India March SAP ERP implementation, and datacenter infrastructure 10 N/A India 2011 outsourcing including managed services. Implement a secure messaging platform for the federal National E-Health March government’s personally controlled EHR initiative; provide 15Transition Authority $25 million 2011 the infrastructure and consultation needed to implement the months (NEHTA) Australia system. Government February National Business Develop and manage a private cloud-computing technology 2011 5 N/A Funding Agency infrastructure to cover 10 government-owned companies Peru January IBM will consolidate and update outdated and incompatible City of New York N/A N/A 2011 IT to improve the technology platform for CITIServ.46 IGS 1Q11 | Professional Services Business Quarterly ©2011 Technology Business Research, Inc.
  47. Appendix – Tables TBRIBM/IGS’ Quarterly Services Signings CONTRACT CLIENT DATE DESCRIPTION YEARS VALUE Provide IT infrastructure and application support services January Air India while implementing SAP enterprise software to automate 7 $50 million 2011 numerous processes at Air India. Deploy and manage IT infrastructure and applications in 16 African countries; consolidate and transform IT environments Bharti Airtel December into an integrated IT system, oversee management of all 10 N/A India 2010 applications, datacenter operations, servers, storage and desktop services; applications support (CRM, billing, self- service). Federal Health Contract extension to provide communications and December Department technology support services, as well as oversee the health 4 $110 million 2010 Australia department’s technology renovation. Implement a new cloud computing model to consolidate andAllied Command December integrate technology capabilities for Command and ControlTransformation N/A N/A 2010 programs; IBM will develop the computing environment to NATO share a common operating environment. Embed security into online care system to safeguard patient American Well December information; integrate security services and skills into N/A N/A United States 2010 application development processes.47 IGS 1Q11 | Professional Services Business Quarterly ©2011 Technology Business Research, Inc.
  48. Appendix – Tables TBRIBM/IGS’ Quarterly Services Signings CONTRACT CLIENT DATE DESCRIPTION YEARS VALUE As part of the Smarter Cape Cod initiative, IBM will deploy technology for more efficient management of physical Spring Barnstable December infrastructure, protection of natural resources, and 2011 County, Mass. N/A 2010 opportunities for economic growth. Phase 1 will design a (Phase United States Strategic Information Office and a Center of Excellence for 1) Water Resources. Smarter Healthcare initiative throughout the country; IBM, Government of November ActiveHealth Management and Medens Corporation will N/A N/A Puerto Rico 2010 deliver cloud services to help physicians share and exchange health information. Working with Finnair to deliver personalized customer service Finnair November and analyze passenger expertise; IBM is providing consulting N/A N/A Finland 2010 expertise, methodology and software to capture, mine and analyze information. Samlink November IBM will manage the IT operations for over 400 bank branches 5 $37 million Finland 2010 and develop a desktop cloud offering. Cabinet Office November IBM signed a Memorandum of Understanding to provide N/A N/A United Kingdom 2010 efficiency strategies. Westpac November IBM will manage Westpac’s main infrastructure services in 5 N/A Australia 2010 addition to providing critical risk mitigation services. StarBev November IT infrastructure services (datacenter, help desk, end-user Multimillion 5 Czech Republic 2010 support) and overall service management. €48 IGS 1Q11 | Professional Services Business Quarterly ©2011 Technology Business Research, Inc.
  49. Appendix – Tables TBRIBM/IGS’ Quarterly Services Signings CONTRACT CLIENT DATE DESCRIPTION YEARS VALUE Bank of Ireland November Manage the Bank’s IT infrastructure (desktop, servers, 5 N/A Ireland 2010 mainframes, local area networks and service desk). Create Smarter Healthcare infrastructure; provide IT support Central Norway to all of the hospitals in Norway to improve coordination and Regional Health November reporting of health information; develop an SAP-based 4 $120 million Authority 2010 solution to be used for upgrading finance and logistic systems Norway throughout Norway. Nevada Clark IBM has been signed to integrate its business analytics County Family October software into the department’s process for efficient delivery N/A N/A Services 2010 of social services. United States Pyro October IBM will develop, test and manage Pyro’s products and 5 $19 million India 2010 solutions. ABN AMRO extended its services agreement with IBM ABN AMRO October whereby IBM will build and provide an integrated IT N/A N/A Netherlands 2010 infrastructure platform. IBM will take over the operation of Petrom’s datacenter Petrom October services, including cloud computing, hosting, installation, 10 N/A Romania 2010 business continuity, on-site backup and disaster recovery. Danish Defense October IBM will provide management services and technology 7 N/A Denmark 2010 infrastructure to the Ministry’s resource management system.49 IGS 1Q11 | Professional Services Business Quarterly ©2011 Technology Business Research, Inc.
  50. Appendix – Tables TBRIBM/IGS’ Quarterly Services Signings CONTRACT CLIENT DATE DESCRIPTION YEARS VALUE Air New October IBM will provide business and technology services through Zealand 5 N/A 2010 mainframe and virtual hosting services. New Zealand Jet Airways September Business transformation and IT services (infrastructure and 10 $62 million India 2010 application support). Bharti Airtel IT infrastructure and application services to support client’s September Limited mobile communications network in 16 African countries; N/A N/A 2010 India deal will be finalized in 4Q10. Sunoco August IBM will provide managed business process services along N/A N/A United States 2010 with application support services to Sunoco. Orbitz will utilize IBMs Global Expense Reporting Solution to Orbitz August provide corporate travel customers more options and N/A N/A United States 2010 flexibility in its management and documentation of travel expenses.50 IGS 1Q11 | Professional Services Business Quarterly ©2011 Technology Business Research, Inc.
  51. Appendix – Tables TBRIBM/IGS’ Application Vendors Partnership Highlights COMPANY SCOPE OF PARTNERSHIP IBM and SAP have helped customers build end-to-end CRM solutions, including mySAP CRM, IBM DB2, WebSphere MQ, IBM eServer iSeries and IBM eServer xSeries. The two also have joint solutions SAP for business intelligence, ERP, PLM and SCM. The latest development of the IBM/SAP relationship is the expansion of the partnership through the introduction of an optimized DB2 Database that improves performance and availability of SAP solutions running on DB2. IGS was one of Oracle’s first global strategic alliance partners and is recognized as an Oracle Global Certified Advantage Partner, a title reserved for partners that have consistently demonstrated the Oracle highest level of competency and commitment to Oracle. IBM BCS has teamed with Oracle for more than 16 years. IBM delivers industry and process expertise, along with implementation methods, tools and accelerators. Since 1999, IBM and Siebel Systems have worked together to deliver a broad range of open, scalable Siebel Systems and carefully integrated solutions. The latest development in the IBM/Siebel relationship is an (part of Oracle) extension of the partnership to offer hosted CRM solutions. IBM and Cisco leverage their strengths in internet infrastructure, e-business systems (applications, middleware, servers) and services (systems integration, support, outsourcing etc.) and deliver end-to-end internet business solutions for e-business transformation. The alliance offers customers Cisco Systems e-business security, availability and applications performance, as well as speech-enabled self-service solutions to contact centers. In the alliance’s latest development, Cisco will sell IBM’s Lotus Sametime directly through its 1,200 channel partners spread throughout the world.51 IGS 1Q11 | Professional Services Business Quarterly ©2011 Technology Business Research, Inc.
  52. Appendix – Tables TBRIBM/IGS’ Application Vendors Partnership Highlights COMPANY SCOPE OF PARTNERSHIP IBM BCS and Dassault Systemes provide customers with product lifecycle management services, which optimize product development processes. The partnership provides business transformation Dassault consulting, implementation, integration and managed services for the CATIA, ENOVIA and Systemes SMARTEAM families of products, and also introduces, integrates and implements Dassault Systemes’ software solutions. IBM BCS and i2 manage other companies’ value chains by providing comprehensive solutions for supply and demand chains. The services accelerate optimization and collaboration across the i2 Technologies entire value chain and allow supply and demand management and timely response to unpredictable events. IBM and Red Hat have joined together to help customers accelerate Linux adoption on the IBM eServer zSeries mainframe. The solutions include IBM’s Integrated Facility for Linux engine and subscription of Red Hat Linux Enterprise v.4 for zSeries systems. The two companies are also Red Hat working together with educators on Linux skills-building and curriculum development. The alliance will help institutions educate students and develop their skills on Linux and IBM software and servers. IBM and Avaya formed an alliance to integrate Avaya’s VoIP technology with IBM’s enterprise e-mail, web conferencing and instant messaging offerings (Lotus Notes and Domino). The alliance Avaya will enable “click-to-call” capabilities in e-mail and instant messaging products across Lotus Notes, Domino and IBM Lotus Sametime. IBM will use audio conferencing provided by Avaya Meeting Exchange with Lotus’ web conferencing solutions.52 IGS 1Q11 | Professional Services Business Quarterly ©2011 Technology Business Research, Inc.
  53. Appendix – Tables TBRIGS Organization Chart Samuel J. Palmisano Chairman of the Board President & CEO TBR Steven A. Mills Michael E. Daniels Mark Loughridge Virginia Rometty SVP, Group Executive SVP, Global Technology SVP, Chief Financial SVP,text Global Sales, Software and Systems Services, IGS Officer Marketing and Strategy Linda Sanford J. Randall MacDonald Rodney C. Adkins Frank Kern SVP, Enterprise on SVP, Demand SVP, Human Resources Systems & Technology SVP, IBM Global Transformation & IT Group Business Services KEY: Dr. John E. Kelly III Jon C. Iwata Corporate SVP & Director of IBM SVP, Marketing/ Functions Research Communications Hardware Group Robert C. Weber Software Group SVP, Legal & Regulatory Affairs & General Services Group Counsel53 IGS 1Q11 | Professional Services Business Quarterly ©2011 Technology Business Research, Inc.
  54. Appendix – Tables TBRPhysical Infrastructure and Worldwide LocationsIGS’ Global Delivery Center Network IBM’s Technology and Business Capabilities Americas EMEA APAC • Slovakia • China • Brazil • Poland • India Global Delivery • Argentina • Romania • Vietnam Centers • Canada • Hungary • Philippines • Egypt • Australia • South Africa • Singapore • San Jose, Calif. • India (New Delhi, • Maryland • Israel (Haifa) Bangalore) Research Labs • New York • Switzerland (Zurich) • China (Beijing) • Austin, Texas • Japan (Tokyo) • Taiwan (Taipei City) • China • Poland • India Software & Hardware • Mexico • Israel • South Korea Labs • Brazil • Egypt • Vietnam • Argentina • Russia • Malaysia • Singapore • Australia • South Africa • China Cloud Computing • Brazil • Poland • India Centers • Germany • South Korea • Vietnam54 IGS 1Q11 | Professional Services Business Quarterly ©2011 Technology Business Research, Inc.
  55. Appendix – Tables TBRPhysical Infrastructure and Worldwide LocationsIGS’ Global Delivery Center Network IBM’s Technology and Business Capabilities Americas EMEA APAC Innovation Centers • Brazil • Czech Republic • Australia • Austin, Texas • Denmark • China • Chicago • France • India • Dallas • Germany • Japan • San Mateo, Calif. • Hungary • South Korea • Waltham, Mass. • Ireland • Malaysia • Mexico • Israel • Philippines • Italy • Vietnam • Morocco • Netherlands • Poland • Romania • Russia • Slovakia • South Africa • Spain • Sweden • Switzerland • Turkey • Ukraine • U.K. Market and Industry • Mexico (retail) • Russia (oil & gas) • India (telecom, Leadership Centers • Brazil (finance) finance) • Austin, Texas • Australia (electricity) (communications) • South Korea (finance) • China (rail, telecom, health, electricity)55 IGS 1Q11 | Professional Services Business Quarterly ©2011 Technology Business Research, Inc.
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