IBM recently exited the consumer PC business, which was killing its overall profitability. Last year, the company exited other low-return businesses such as DRAM manufacturing, networking hardware, and global networking, resulting in a higher overall profit margin. More important, by focusing on the corporate side of the PC business, especially mobile units, the personal systems group managed to stay profitable despite a slowing PC sales environment. The company continues migrating further into global services as part of an overall corporate strategy to offer more solutions that combine services, software, and hardware. This segment will be much less cyclical than the hardware business, making it much more predictable.
Software continues to increase in importance to the overall solutions game plan.
Most investors and IT managers are familiar with IBM's Tivoli product lines, but the company has also been rapidly expanding its middleware software, including WebSphere, MQ-Series, and DB2. Free cash flow is operating cash flow minus all capital expenditures. My guess is that the earnings estimate is probably safe, notwithstanding a major recession, but the top-line growth rate, adjusted for currency impact, may end up on the light side. However, no one can argue with its cash flow. William Schaff is chief investment officer at Bay Isle Financial Corp., which manages the InformationWeek 100 Stock Index.