Monday, January 28, 2008

Lotus operation blooms; Bay State to benefit

By Christopher Calnan

While the tech world awaits IBM Corp.'s official launch of an iPhone application, local industry observers say the move -- along with a new SAP partnership and the acquisition of a Burlington software maker -- signals a bolstering of Big Blue's local operations and raises Lotus' profile for business customers.

It's also in line with Armonk, N.Y.-based IBM's plans to grow the percentage of overall business coming from its software divisions. Since two of IBM's five software brands are based in Massachusetts, the changes should bode well for the region.

"I think, if anything, they'll expand their (local) presence," said Allan Krans, an analyst for Hampton, N.H.-based Technology Business Research Inc.

From its Lotusphere event in Orlando, Fla., this week, IBM executives revealed a new partnership with German tech giant SAP AG to develop a new product that integrates Lotus Notes with SAP's business-intelligence software. And the company was expected to launch an application that enables users of Apple Inc.'s wildly popular iPhone to access the Lotus Domino server for e-mail.

Although an official IBM iPhone-related announcement didn't materialize earlier this week, it seems to be just a matter of time, according to IBM executives. Lotus strategy team member Alan Lepofsky this week characterized access for the iPhone to the Domino server as "very important for IBM."

Most of the Lotus product development is being done at IBM facilities in Westford and Littleton, said Lepofsky, and the Lotus software group is "looking for new opportunities and markets."

IBM also operates its Rational Software unit in Lexington, and in separate news that fits within its software revenue growth goals, IBM reported Wednesday it had acquired Burlington-based business event software maker AptSoft Corp.

"Lotus is a key player in the Massachusetts' infrastructure," said Lepofsky, who declined to speculate on specific growth or hiring.

Rudy Minar, a partner in Boston investment bank America's Growth Capital, said the iPhone feature is specifically being viewed as a way to help IBM keep pace with Microsoft Corp. -- especially in terms of business users.

"It brings them out from operating in the shadow of Microsoft," he said. "It makes them very much relevant."

The AptSoft acquisition, meanwhile, enhances IBM's commitment to service-oriented architecture products, the company said, and AptSoft products will be rolled into the IBM WebSphere software brand.

Sammy Desai, managing director for Boston investment bank Needham & Co. LLC, however, described IBM's software acquisitions as "all over the map" -- making it unclear what type of software Big Blue is trying to strengthen.

Last year, IBM acquired two companies -- Waltham's Watchfire Corp. and Sweden's Telelogic AB -- that were expected to strengthen its Rational division, IBM's lowest performing software division in 2006.

Big Blue officials have said they plan to grow the company's software business from 20 percent of total revenue to 50 percent by 2010. Software sales accounted for 19.5 percent of revenue in the third quarter 2007 and 19.6 percent of revenue in the fourth quarter 2007.

In June 2007, IBM released its Lotus Connections, the company's social software for businesses, which was "rapidly adopted by our customers," IBM reported in its fourth quarter 2007 earnings filing.

The SAP and iPhone announcements follow a strong fourth-quarter 2007 for IBM, which posted revenue of $28.9 billion, a 10 percent increase for the quarter when compared with the same period in 2006. Its $6.3 billion in quarterly software revenue was a 12 percent increase compared with the same period in 2006. During fourth-quarter 2007, Lotus revenue increased 7 percent over the same period in 2006, according to IBM.

And while IBM didn't disclose revenue numbers -- just growth figures -- of individual software brands, Lotus posted 12 percent revenue growth during 2006, according to the company's annual report.

IBM plans to grow through its software divisions by investing in research and development combined with acquisitions, said Technology Business Research's Krans. And while some industry observers may question the rhyme and reason behind particular acquisitions, software is typically more profitable than hardware, said Krans, so the company's approach seems to be a reasonable one.

"That's the ultimate goal, to use software to drive overall profitability," he said.