Software Sales Drives IBM Revenue Growth

Software profits soared 22 percent in the first quarter, as IBM ups its OEM software push.

Software continues to drive revenue for IBM, with the company's software group accounting for $4.8 billion for the first quarter of 2008, an increase of 14 percent over the same period last year.

Although services continue to lead in generating IBM's revenue, software profit grew 22 percent in the first quarter of 2008, according to IBM's earnings announcement April 16. IBM officials said a significant part of IBM's growth strategy with its software business are OEM (original equipment manufacturing) agreements, through which vendors are embedding IBM software inside their own products, to meet specific customer needs.

IBM officials claim the company coined the term "OEM" in the 1950s when it began to incorporate subassemblies from other vendors into its computer systems. Today, IBM is ramping up its efforts to sell IBM software "under the covers" via OEM deals as part of its push to boost profits, create other routes to market, and reach out to new customer segments such as consumers and retail, the company said.

IBM's software group has become the fastest-growing contributor to the company's revenue, accounting for $4.8 billion of IBM's total $24.5 billion revenue year-to-year as reported in the company's earnings announcement. IBM is focusing on OEM sales as part of its strategy to grow its software business and meet IBM's overall profit objectives.

OEM software sales revenue has been boosted by several IBM software acquisitions that have expanded the company's portfolio of OEM offerings. Newly acquired products and technologies from companies such as Ascential Software, FileNet Informix, Micromuse and MRO are resulting in significant growth for IBM's OEM software business, as IBM takes a nontraditional approach to generating software revenue.

Yet, the more traditional approach has its benefits as well for IBM. Revenues from IBM's middleware products, which primarily include WebSphere, Information Management, Tivoli, Lotus and Rational products, were $3.8 billion, up 16 percent versus the first quarter of 2007.

For the WebSphere family of software products, revenues increased 20 percent. Revenues for Information Management software increased 27 percent and include growth from the acquisition of Cognos, which closed in the quarter. Revenues from Tivoli software increased 9 percent; revenues for Lotus software increased 17 percent year; and revenues from Rational software, which provides integrated tools to improve the processes of software development, increased 3 percent, the company said.

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On April 17, IBM announced two new OEM agreements. Linksys, a division of Cisco, announced an agreement to integrate IBM's Tivoli Continuous Data Protection for Files software onto their network-attached storage devices to create a data protection solution for small businesses.

Also through this agreement, a shrink-wrapped version of the continuous data protection software will be available for purchase through retailers, IBM officials said. Linksys is calling its offering the Linksys by Cisco Continuous Data Protection for Files solution.

"We are expanding the market for IBM software products and technologies by making them key ingredients in a variety of products sold by other companies," said Daren Hanson, director of IBM OEM software sales, in a statement.

"More than ever, software has become the central nervous system for all kinds of consumer and business products. The Linksys CDP solution is an excellent example of how companies are finding new opportunities for tapping IBM's software portfolio-whether it's for IBM storage software, collaboration tools, middleware or speech recognition technology in global positioning systems-as a source of innovation through OEM agreements."

Meanwhile, Omnitrol Networks announced that it has embedded IBM's WebSphere RFID Information Center software into the Omnitrol Work-In-Process appliance to create an EPC (Electronic Product Code)-based traceability and tracking solution for the manufacturing and logistics industries.