Ref: http://www.ibm.com/annualreport/2013/chairmans-letter.html
What will we make of this moment—as businesses, as individuals, as societies?
What will we make with a planet generating
unprecedented amounts of data? What will we create from—and with—global
networks of consumers, workers, citizens, students, patients? How will
we make use of powerful business and technology services available on
demand? How will we engage with an emerging global culture, defined not
by age or geography, but by people determined to change the practices of
business and society?
Dear IBM Investor:
What will we make of this moment—as businesses, as individuals, as societies?
What will we make with a planet generating
unprecedented amounts of data? What will we create from—and with—global
networks of consumers, workers, citizens, students, patients? How will
we make use of powerful business and technology services available on
demand? How will we engage with an emerging global culture, defined not
by age or geography, but by people determined to change the practices of
business and society?
Virginia M. Rometty
Chairman, President and Chief Executive Officer
To capture the potential of this moment, IBM
is executing a bold agenda. It is reshaping your company, and we believe
it will reshape our industry. In this letter I will describe the
actions we have taken and are taking, and the changed company that
is emerging from this transformation. I believe that if you
understand our strategy, you will share our confidence in IBM’s
prospects—for the near term, for this decade and beyond.
Let’s start with the phenomenon of our age—data.
A planet of data
Today, every discussion about changes in technology, business
and society must begin with data. In its exponentially increasing
volume, velocity and variety, data is becoming a new natural resource.
It promises to be for the 21st century what steam
power was for the 18th, electricity for the 19th and hydrocarbons
for the 20th. This is what we mean by enterprises, institutions and our
planet becoming smarter.
Thanks to a proliferation of devices and the infusion of
technology into all things and processes, the world is generating
more
than 2.5 billion gigabytes of data every day, and 80 percent of it is
“unstructured”—everything from images,
video and audio to social media and a blizzard of impulses from
embedded sensors and distributed devices.
This is the driver of IBM’s first strategic imperative:
To make markets by transforming industries and professions with data.
The market for data and analytics is estimated at $187 billion
by 2015. To capture this growth potential, we have built the world’s
broadest and deepest capabilities in Big Data and analytics—both
technology and expertise. We have invested
more than $24 billion, including $17 billion of gross spend on
more than 30 acquisitions. We have 15,000 consultants and 400
mathematicians.
Two-thirds of IBM Research’s work is now devoted to
data, analytics and cognitive computing. IBM has
earned 4,000 analytics patents. We have an ecosystem of 6,000
industry partners and 1,000 university partnerships around the world
developing new, analytics-related curricula.
IBM provides the full array of capabilities our clients need to
extract the value of Big Data. They can
mine multiple structured and
unstructured data sets across their business. They can apply a range of
analytics—from descriptive to predictive
to prescriptive. And importantly, they can
capture the time value
of data. This matters, because the battle for competitive advantage in
this new world can be lost or won in fractions of a second.
(sounds like quant investment)
Our data and analytics portfolio today is the deepest in the
industry. It includes
decision management, content analytics, planning
and forecasting, discovery and exploration, business intelligence,
predictive analytics, data and content management,
stream computing, data warehousing, information integration and
governance.
“Traditional
computing systems, which only do what they are programmed to do, simply
cannot keep up with Big Data in constant motion.”
This portfolio provides the basis for the
next major era in
computing—cognitive systems. Traditional computing systems, which only
do what they are programmed to do, simply cannot keep up with Big Data
in constant motion. For that, we need a
new paradigm.
These new systems are not programmed; rather, they
learn, from the vast quantities of information they ingest, from their
own experiences, and from their interactions with people.
IBM launched this era three years ago, when our Watson system defeated the two all-time champions on the quiz show
Jeopardy!
Watson has since matured from a research grand challenge into a
multifaceted business platform, enabled globally via the cloud.
Earlier this year we launched the
IBM Watson Group. It will
comprise 2,000 professionals, a $1 billion investment and an ecosystem
of partners and developers that we expect to scale rapidly. In the
process, we believe Watson will change the nature of computing, as it is
already beginning to change the
practice of healthcare, retail, travel, banking and more.
Taken together, our investments in data and analytics are
driving significant growth, with 40,000 service engagements to date,
growing by double digits. In 2013 our business analytics revenue rose 9
percent—led by Global Business Services and
Software. This is already a nearly $16 billion business for us,
and we have raised our expectations for it.
An IT industry remade by cloud
At the same time that industries and professions are being
remade by data, the information technology infrastructure of the world
is being transformed by the emergence of cloud computing—that is, the
delivery of IT and business processes as digital
services.
It is estimated that by 2016, more than one-fourth of
the world’s applications will be available in the cloud, and 85 percent
of new software is now being built for cloud.
This is driving IBM’s second strategic imperative:
To remake the enterprise IT infrastructure for the era of cloud.
As important as cloud is, its economic significance is often
misunderstood. That lies less in the technology, which is relatively
straightforward, than in the
new business models cloud will enable for
enterprises and institutions. This is creating
a market that is expected to reach $250 billion by 2015.
“Cloud’s
long-term significance lies less in its technology than in the new
business models it will enable for enterprises and institutions.”
IBM today is the leader in enterprise cloud, a position we have
enhanced through investments of $7 billion on 15 acquisitions, most
notably SoftLayer in 2013.
We provide the full spectrum of cloud
delivery models—infrastructure as a service,
platform as a service, software as a service and business process
as a service. IBM’s cloud capabilities are built on 1,500 cloud patents
and supported by thousands of cloud experts. Eighty percent of Fortune
500 companies use IBM’s cloud
capabilities.
Our cloud foundation at the infrastructure level is SoftLayer,
the market’s premier public and private cloud environment, with “bare
metal” dedicated servers that provide unmatched compute power, deployed
in real time, with hundreds
of configuration options. Our public cloud processes 5.5 million
client transactions every day.
In terms of technology, security, flexibility and pricing, IBM
surpasses all our major competitors. And our rapidly growing roster of
30,000 client engagements—including companies like Honda, Sun Life
Stadium, US Open Tennis and hundreds of top online games with a user
base exceeding 100 million—is a testament to that.
These companies and a growing number of others understand that
their customer-facing applications—which they deploy on public clouds
for reasons of cost, accessibility and speed—must be integrated with
their core enterprise systems—such
as finance, inventory, manufacturing and human resources. This is
why one analyst predicts that
by 2017, nearly 50 percent of large
enterprises will use hybrid cloud environments that are part public,
part private and integrated with back-end systems.
It is also why a new class of “cloud middleware services” is
emerging to manage these complex environments. Last month we announced
several capabilities that will connect enterprise data and applications
to the cloud. IBM’s entire
enterprise software portfolio is becoming available to developers
in an open, composable business environment to build applications with
flexibility and scalability. A “cloud first” approach is being
implemented in IBM software development
labs globally.
For line-of-business users looking to drive innovation—including
heads of finance, marketing, human resources, procurement and other
functions—we offer an unmatched array of more than 100
software-as-a-service (SaaS) offerings.
IBM’s
SaaS offerings today support 24 of the top 25 companies in the
Fortune 500. Going forward, companies will continue to unlock the value
of these business applications. For example, nearly 70 percent of
organizations are currently using or planning
to use composable business services.
Finally, enterprises will want—and need—to manage their data in
the cloud with the same rigor as if it were on-premises. Companies will
do this in order to ensure auditability, visibility, change control,
access control and data loss protection.
Indeed, data management will arguably be the single most important
design point for enterprise cloud environments, driven not only by
security and cost, but also by regulation.
To meet growing demand for greater speed, and legal requirements
for compliance and data residency, IBM is aggressively expanding its
global cloud footprint. We currently have 25 data centers globally, and
the new $1.2 billion investment announced
in January will see the opening of 15 more, in the US, the UK,
Australia, Brazil, Canada, China, France, Germany, India, Japan and
Mexico.
The impact of our cloud investments shows up clearly in our
results. IBM’s cloud business grew 69 percent in 2013, delivering $4.4
billion of revenue. As we actively embrace cloud in order to deliver
“IBM as a Service” to our clients,
we expect to see significant benefits in client experience,
revenue growth and enterprise productivity.
Engagement in a world of empowered individuals
The phenomena of data and cloud are changing the arena of global
business and society. At the same time, proliferating mobile technology
and the spread of social business are empowering people with knowledge,
enriching them through networks and changing
their expectations.
This leads to IBM’s third strategic imperative:
To enable “systems of engagement” for enterprises.
Complementing traditional back-office systems of record,
enterprises are now taking
a systematic approach to engagement with all
of their constituencies—customers, employees, partners, investors and
citizens. Indeed,
57 percent of companies now
expect to devote more than a quarter of their IT spending to these
new systems of engagement by 2016, nearly twice the level of 12 months
ago.
“Enterprises
are now taking a systematic approach to engagement with all of their
constituencies—customers, employees, partners, investors and citizens.”
They are doing so because the way their customers and their own
workers expect to engage is undergoing profound change. Seventy percent
of people who contact a company via social media today expect a response
within five minutes.
Nearly 80 percent
of adult smartphone users keep their phones with them an average
of 22 hours a day. This is why we launched IBM MobileFirst in 2013, and
why we have made eight acquisitions to advance our mobile initiatives.
We have 3,000 mobile experts, and have
been awarded hundreds of patents in mobile and wireless
technologies.
When these individuals use their mobile devices to engage with a
company, they expect personalized service. Indeed, 80 percent of people
are willing to trade their information for a customized offering.
The good news is that this is increasingly possible, thanks to
social business and data analytics. But it’s not that simple. One only
needs to follow the news to see rapidly rising concerns—legitimate
concerns—
about data security and
institutional trust. Two-thirds of US adults say they would not
return to a business that lost their confidential information. And the
economic stakes are enormous. One analyst estimates that by 2016, there
could be an additional $1 trillion
of growth in global online retail—if the industry can enhance
trust.
We have strengthened our already clear leadership in
enterprise-class social business and in security. Our acquisitions in
social include Kenexa, which helps companies use behavioral science not
just to connect with people, but to understand and build
lasting engagement with them. And we have made a dozen
acquisitions in security, building a capability of more than 6,000
security experts, 3,000 patents and 25 labs worldwide.
Finally, IBM is leading by example in building modern enterprise
systems of engagement and learning. Our social platform, Connections,
has 300,000 IBM users and 200,000 communities. There are more than
30,000 IBMers active on Client Collaboration Hubs
for our top 300 accounts. Last year, hundreds of thousands of
IBMers worldwide shaped the practices that define how we work. And they
are enhancing their skills daily through a massive open online learning
system called THINK Academy.
In 2013, we achieved year-over-year growth of 69 percent in mobile, 19 percent in security and 45 percent in social business.
Our performance in 2013
You can learn more about the IBM Strategy
here. This is the context in terms of which to understand our performance in 2013.
By many measures, it was a successful year for IBM. Our diluted
operating earnings per share in 2013 were $16.28, a new record. This
marked 11 straight years of operating EPS growth. We grew operating net
income by 2 percent, to $18 billion.
In 2013 we invested $3.1 billion for 10 acquisitions. We
invested $3.8 billion in net capital expenditures. We invested $6.2
billion in R&D, while earning the most US patents for the 21st
straight year.
While making all these investments in IBM’s future capabilities,
we were able to return $17.9 billion to you in 2013—approximately $13.9
billion through gross share repurchases and $4.1 billion through
dividends. Last year’s dividend
increase was 12 percent, marking the 18th year in a row in which
we have raised our dividend, and the 98th consecutive year in which we
have paid one.
However, we must acknowledge that while 2013 was an important
year of transformation, our performance did not meet our expectations.
Our operating pre-tax income was down 8 percent. Our revenue in 2013, at
$99.8 billion, was down 5 percent as reported
and 2 percent at constant currency.
So, while we continue to remix to higher value, we must also
address those parts of our business that are holding us back. We have
two specific challenges, and we are taking steps to address both.
The first involves shifting the IBM hardware business for new
realities and opportunities. We are accelerating the move of our Systems
product portfolio—in particular, Power and storage—to growth
opportunities and to Linux, following the
lead of our successful mainframe business. The modern demands of
Big Data, cloud and mobile require enterprise-strength computing, and no
other company can match IBM’s ongoing capabilities and commitment to
developing those essential technologies.
We also announced, in January, an agreement to sell much of our
Intel-based x86 server business to Lenovo. This divestiture is
consistent with our continuing strategy of exiting lower-margin
businesses, such as PCs, hard-disk drives and retail store
solutions. But let me be clear—we are not exiting hardware. IBM
will remain a leader in high-performance and high-end systems, storage
and cognitive computing, and we will continue to invest in R&D for
advanced semiconductor technology.
The second challenge involves the world’s growth markets. While
IBM’s growth in Latin America and Middle East and Africa was strong,
enterprise spending slowed in other key growth markets. We are
intensifying focus on new growth opportunities.
Overall, the opportunity in the world’s growth markets remains
attractive.
On being essential
As we have learned throughout our history,
the key to success is
getting the big things right, innovating and investing accordingly, and
challenging our organization, operations and especially our culture to
adapt.
When you do all those things, you do more than stay abreast of
change. You lead it. You invent entirely new capabilities—such as
cognitive computing and Watson. You translate these innovations into
sustainable economic value—such as building
cloud infrastructure that is enterprise-class and societally
robust. And you make yourself a laboratory for the future—of work, of
engagement, of the modern enterprise.
The progress we are making on these strategic imperatives is
highly encouraging. No company in our industry is positioned as strongly
as 103-year-old IBM for the world now taking shape. We are confident in
our vision, our strategy and our prospects.
Every generation of IBMers has the opportunity—and, I believe,
the responsibility—to invent a new IBM. This is our time. We are working
to make this not just a successful business, but an essential
institution for our clients and the world
in a new era.
I am deeply proud of the global IBM team for bringing us here,
and I am grateful to you, our shareholders, for your unwavering support.
I hope you share our excitement about your company’s path and the
shared opportunity we have, together, to
build a brighter future on a smarter planet.
Virginia M. Rometty
Chairman, President and Chief Executive Officer
