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IBM's Small-Biz Engine That Could

Another quarter, another dose of disappointing revenues: That's the way it goes for tech giant IBM (IBM) these days. But rays of hope are emerging, and one of them comes from a surprising source: Sales to small and midsize businesses.

In the so-called SMB market, IBM's third-quarter revenues rose a strong 10%, to $4 billion, the second consecutive quarter of double-digit growth. SMB now accounts for 20% of IBM's overall revenues, so it's big enough, potentially, to be a growth engine for the whole company. "They're there in a big way, and they're looking to make it even bigger," predicts analyst Ray Boggs of tech market researcher IDC.

BRIGHT SPOTS. Overall, third-quarter results, reported Oct. 17, were solid if uninspiring. Profits were good. Net income from ongoing businesses -- excluding special items -- increased 19%, to $2 billion. Thanks to 15,000 job reductions, mainly in slow-growing Western Europe, and other cost-cutting efforts, the company's gross profit margin increased to 40.6% in the third quarter, from 38.7% in the disappointing first quarter (see BW Online, 5/5/05, ""More Than Emergency Surgery").

However, comparable revenues expanded a tepid 4% in the third quarter, to $21.5 billion and missed analysts' estimates. The main reason: Global services, half of the business, grew a mere 3%. Within global services, the slowest growth came from information technology services, or ITS. The best? Business transformation outsourcing, which climbed 35%. Other bright spots: WebSphere middleware software sales, up 14%, and the SMB business.

IBM Chief Financial Officer Mark Loughridge highlighted SMB performance in the company's earnings call with analysts after the markets closed, saying, "We had particularly strong growth in the small to midsize market."

"WHERE THE GROWTH IS." IBM shares, which started off the year at $97.75 and dropped to $72 after a first-quarter earnings disappointment, have been trading in the low $80s recently. Analysts have set target prices in the $90s. The initial response to third-quarter results was positive. The shares rose 2.1%, or $1.71, to $84.30 in extended trading on Oct. 17.

Big Blue has had a dedicated sales unit focusing on SMB for over a decade but has been pushing harder over the past few years. The main reason: "It's where the growth is," says Steve Solazzo, who was appointed general manager of the 7,000-strong worldwide SMB unit in July.

IDC expects the global SMB market to increase 7.6%, to $140 billion, this year -- compared with 5.6% for the overall tech industry. Growth is happening fastest in emerging economies, including China, India, Brazil, and Russia, where IBM is rapidly trying to expand operations. The company concentrates on outfits within the segment with 100 to 1,000 employees -- what analysts call midsize businesses.

IN THE EXPRESS LANE. Solazzo's unit continues to grow well in spite of IBM's sale last May of its $10 billion PC unit to China's Lenovo. That's partly because IBM has held onto a sizable and lucrative piece of the business -- services. Indeed, services have become one of the pillars of the company's SMB strategy. Those sales now represent 42% of the business, up from 36% in 2002 (see BW, 5/30/05, "A Big Step Back for Big Blue").

And you can expect that services slice to expand. When IBM Chief Executive Samuel J. Palmisano appointed Solazzo to the new position, his orders were simple: Sell more software and services. IBM offers a vast array of services for small businesses -- both directly and through reseller partners. Direct offerings include running data centers, hosting applications, and desktop support through call centers.

SMB sales started to take off three years ago after IBM launched its so-called Express strategy. Rather than selling most of its PCs, servers, software, and services as discrete items, IBM created special SMB packages designed to be inexpensive, easier to buy, and simpler to install and maintain. Then it trained more than 6,000 resellers to sell and support the packages.

The company introduced 20 new Express packages earlier this month. They include an e-mail security service that costs customers just $2 per user per month, and a supply-chain management system -- delivered over the Internet as a service -- that's priced at just a few hundred dollars a month.

MIDSIZE AMBITIONS. Solazzo's strategy going forward is to create packages for particular industries -- be they retail, manufacturing, or distribution. For instance, one of the new Express offerings is aimed at retailers. It is designed around radio frequency identification, or RFID, which helps companies track deliveries. The package is aimed at suppliers to Wal-Mart (WMT), the Defense Dept., and other customers, since these clients now demand that merchandise shipped to them has RFID tags attached. IBM makes it easier for suppliers to comply quickly because the only equipment they need to install is an RFID tag printer. All of the computing is handled at an IBM data center.

Though IBM typically targets companies with 100 or more employees, it's not neglecting the low end of the SMB segment, traditionally the domain of Dell (DELL). On Sept. 27, IBM released a super-low-cost server, priced at $599 and aimed at companies with fewer than 50 employees.

Will IBM become the leading tech supplier for these smaller concerns? Don't hold your breath. But, it's well positioned to keep momentum going among midsize businesses. And if IBM plays that market right, there are enough of those outfits around to create a sizable business -- and a growth engine for the company.


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