I.B.M., after all, is the leading supplier of information technology — hardware, software and services — to corporations and governments. So the company’s results are routinely viewed as a significant snapshot of the broader tech economy — a glimpse into wider trends in the industry, a bellwether.
It’s the obvious inference to make. And heaven knows, I’ve done it myself many a time, in the ritualistic attempt to give the sweep of significance to a quarterly earnings story. But I think it is less and less true.
I.B.M. is doing its own thing in the enterprise market, much as Apple is in consumer technology. Both are separated from the industry pack. In I.B.M.’s case, to be sure, that separation has been a more subtle and evolutionary process than it has been at Apple, the blockbuster product machine.
The I.B.M. long-term game plan has included aggressive expansion into higher-growth markets abroad and a buildup of its global work force. But it has also included moving up the industrial food chain to higher-profit businesses. That has meant shedding hardware divisions like personal computers and disk drives, and shifting its big services business toward more challenging work — like traffic management and policing for cities around the world.
As a result, while I.B.M. is not immune to macroeconomic shocks and industry cycles, it is remarkably insulated from them. Recall that this is a company that pre-announced its quarterly results in the depths of the financial crisis — to say that it would handily surpass analysts’ forecasts.
Earlier this month, Steven Milunovich, a longtime I.B.M. follower who joined UBS recently, began coverage of I.B.M. with a report, “Surfing the Computing Waves.” It stated, “I.B.M. is the textbook example of how getting strategy — a differentiated position — right is crucial.” (He has a “neutral” recommendation on I.B.M., based on the run-up in its shares over the past year compared with those of other major technology suppliers.)
Can I.B.M. keep it up? Revenue was down in the second quarter. A stronger dollar trimmed about $1 billion in revenue compared with the year-earlier quarter, yet I.B.M.’s revenue has been soft for a few quarters now.
But there were some intriguing details in the I.B.M. conference call and presentation last week. Higher profit margins were the main reason the company’s operating earnings per share rose 14 percent — and all of the improvement came from I.B.M.’s services business, the company’s largest, with about $60 billion a year in revenue. (In I.B.M.’s presentation to analysts, see slides No. 6 and No. 13).
I.B.M. talks about the “industrialization of services” as a key strategic goal. That industrialization process includes paring services jobs down to standardized, repeatable tasks; spreading the work around to world to where it can be done most efficiently and most inexpensively; and steadily automating simpler tasks with software.
The benefits of a globalized work force should diminish over time, as wages rise for skilled workers in India, for example. But if more and more services work can be done with software instead of people, I.B.M.’s profit margins could well keep improving — and the company could separate itself further from other tech suppliers.
In response to an analyst’s question last week, Mark Loughridge, I.B.M.’s chief financial officer, said that much of the profit improvement came from projects that joined the company’s research scientists with services teams to automate tasks. That, Mr. Loughridge said, is a “unique capability that I don’t think you’d see in our competitors.”