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Five-year Forecast
Barring IBM's adoption of our three-pronged recommendation, Big Blue as we know it today will begin to shrink again after 2004. And it may never again reach or surpass the revenue peak of $88.4 billion it attained in 2000.
We expect IBM revenues to decline at a compound annual rate of 1% during the next five years (2003-2007). But, the revenues will grow by about 8% this year, and before flattening out in 2004. After that, stand by for their descent to pre-1997 levels ($78 billion) over the following three years (see the chart on page 2).
IBM 2002 revenues were merely at the same level it was five years earlier (in 1998), which means that, unless IBM adopts an aggressive acquisition strategy, the company will have wasted a decade by basically staying put or shrinking.
One reason for an expected lack of growth over the next five years is that IBM is in too many declining businesses. The only Big Blue business unit that can be expected to show any kind of growth is IBM Global Services (IGS).
We figure that the services (without maintenance) will grow by about 7% annually between 2003 and 2007. That's when it will account for about $43.4 billion or 56% of IBM's total revenues. With maintenance, which we figure will decline at about 3% annually; IGS will represent about 61% of IBM's total in 2007.
IBM hardware products, on the other hand, not long ago the mainstay of Big Blue's business and its pride and joy, will drop by 13% compounded annually between 2003 and 2007. Hardware will account for only $16 billion or just over one-fifth of IBM revenues five years from now.
Software revenues will also drop, albeit at a slower rate. They will decline at 1% annually to 16% of IBM 2007 revenues. As a result, IBM profit margins will erode as will the company's earnings. Big Blue gross margins have already dropped from 56% to 37% between 1990-2003. Operating margins shrank from 16% to 11% during the same period.

IBM net margins,...