SAN FRANCISCO --
is taking a page from social networking Web sites.
The latest version of Lotus Notes, IBM's legacy suite of business programs, has instant messaging, blogging capabilities and other features modeled on sites such as Facebook and
Software has become more important to IBM because it is highly profitable and can help Big Blue reach its
goal of doubling earnings per share by 2010. That's a tall order for a company with more than $90 billion in annual revenue and a history stretching back to 1889.
Spurring upgrades of Lotus Notes can open a strong stream of sales. There are about 135 million active Lotus licenses, making it IBM's most widely used software product.
What's more, software sales carry much higher profit than IBM's other sources of revenue. In the last quarter, gross margins on software were 85% vs. 30% for services and 37% for hardware. CFO Mark Loughridge attributed one-third of the increase in total profitability to sales of higher-margin products, mostly software.
"Software is now our largest provider of IBM profit and our most stable source of growth," said Loughridge
during the company's earnings conference call in July.
Shares of IBM closed Monday off $1.68 to $109.22.
Software revenue grew 13% from the previous quarter last year and 9% when adjusted for currency effects that inflate sales figures when the dollar is weak. This outpaced total revenue growth of 6% when adjusting for currency effects.
But software accounted for only 20% of total revenue, which implies that sales of Lotus Notes and other software must continue to outpace sales of hardware and services in order to have an appreciable effect on the company's profit growth.
For the new version of Lotus Notes, IBM's sales pitch is simple: Employees will be more productive if business programs include features that have become popular for making friends on the Internet.
Central features of the new Lotus suite allow employees to form "discussion groups" or personal blogs on a corporate network. They can use theses tools to exchange ideas for projects, update their bosses when they reach milestones, or post resumes in case a job opens up in another part of the company.
These features are useful for companies that have mobile staff or employees scattered across countries and continents.
IBM added a "buddy list" to Lotus Notes to show which people in someone's contact list are online and can be reached. This concept, called "presence," is taken straight from social networking sites and instant-messaging applications and is increasingly popular in the corporate world.
, for example, have talked at length about building "presence" features into mobile and fixed communications devices.
"Instant messaging is a great addition to Lotus because it's like a tap on the shoulder to ask a quick question," said Dale Sinstead of Canada's fuel retailer, Pioneer Petroleums, which uses Lotus Notes. "You don't have to send an email and hope they see it, and you can get your answer in less time than it takes for your phone to ring."
Pioneer Petroleum has about 200 employees working in its gasoline stations in Ontario. IBM says the social networking features of Lotus Notes are just as useful for larger corporations.
There are over 25,000 customers testing an early version of Lotus Notes.
IBM's software stable also includes its fast-growing WebSphere middleware application. WebSphere helps separate applications for inventory and finance, for example, share information even if they were made by different companies. Middleware accounts for 53% of IBM's software sales.
Future quarters will show whether the new Lotus Notes can match or beat WebSphere's 20% growth in the past quarter.
But the bigger question is whether software will be the key to doubling IBM's EPS by 2010 or if Big Blue will have to rely on or financial engineering.
IBM has borrowed heavily to fund an aggressive pace of stock buybacks. In April, the company's board approved
$15 billion in buybacks and spent most of that by the end of May, mopping up about 8% of shares outstanding.
It has about $1.8 billion remaining for buybacks through the rest of 2007.
All told, IBM expects the buybacks, software sales and pension benefit cutbacks to boost annual earnings per share 13% to 14%.