IBM may acquire more software companies this year following two recent purchases as it tries to boost software's share of total IBM profit to 50 percent, according to analysts.
International Business Machines Corp is banking on software, which accounts for 20 percent of revenue but generates 40 percent of pretax earnings, to lift overall profitability of a company that spans computer hardware, services and software.
Gross profit margins at the company's software unit, led by Steve Mills, are typically the highest of IBM's four main businesses and stood at 83.6 percent in the first quarter. The hardware unit's profit margin, by comparison, was 34.8 percent, and global technology services came in at 29.2 percent.
IBM of Armonk, New York, is the world's second-largest software maker, behind Microsoft Corp One area where IBM sees opportunity is selling software to companies that repackage it with their own software. For example, IBM last week announced an expansion of a deal with network equipment maker Cisco Systems Inc under which Cisco will use IBM software to help customers better manage their communications networks.
IBM said its business in that market, called OEM for original equipment manufacturer, is growing at a double-digit annual percentage rate following acquisitions in recent years. The company has signed more than 4,500 deals with companies that use IBM software in their products.
"There's a good opportunity out there," Mills said in an interview. "We're moving more and more toward the commercial off-the-shelf model" in which customers buy IBM software and use it in their own applications.
Industry researcher IDC estimates the market for such products at about $25 billion annually, said Paul Edwards, program director for software sales channels at IDC. Among the fastest-growing segments is security software, Edwards said, an area in which IBM has been expanding.
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