International Business Machines ( IBM) is the company Hewlett Packard ( HPQ) secretly wants to be, one where high-margin service and software businesses support huge but slow-growing (at best) hardware divisions.
An innovation can be as simple as your bookkeeper reducing a bill paying process by 3 steps and thus saving 5 minutes per bill, to an entirely new product line, to an improvement to a current product, to a new high margin service, to a new cultural ritual to improve employee engagement.
The company reported wireless operating income margin of 32.9% and EBITDA margin on service revenues of 50.4%.
Wireless operating income margin was 30.8 percent and segment EBITDA margin on service revenues (non-GAAP) was 49.0 percent, both record highs.
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Just recently, Rackspace announced its intention to lease data center space from Equinix in order to reduce its own capital outlays and generate higher-margin Fanatical Service revenue.
In fourth-quarter 2012, wireless operating income margin was 24.0 percent and segment EBITDA margin on service revenues (non-GAAP) was 41.4 percent, down 80 basis points from fourth-quarter 2011.
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Gross margin, however, will likely remain higher because this increase will pull subscribers away from low incremental margin DVD plans to the virtual 100% incremental margin streaming service.
It could blow some service vendors off the high-margin mountain.
Their plan was to sell low-margin baby goods with maximum customer service: Moms could place an order once and renew it on a regular basis, often with free overnight shipping.
Otherwise, margin increase would come from offering an equivalent level of service at a better production-to-retail cost differential.
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ADP, serving 570, 000 business clients, recently streamlined, disposing of lower-margin and slower-growing units, such as a service that processes stock transactions.
The industry was super competitive, and service providers were looking ways to improve customer loyalty and use of higher-margin data plans.
In the current economic climate, depositors are seeking to develop a relationship with a bank whose purpose is to service and support its customers, rather than one completely focused on its profit margin.
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For each (low-margin) pencil sold in Office Depot's corner of Amazon, the online service gets just a small fee.
Nikolay Sobolev, Severstal's finance chief, adds that a further twist to the strategy is for Severstal to build a dealer network to sell high-margin services, such as adapting its vehicles for school and hospitals, providing full-service leasing arrangements and offering credit terms with local banks.
Lucrative service revenue, which can often represent a multiple of the initial purchase price and bring in a net profit margin well above the companywide 11% enjoyed last year.
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