IBM 2002 Annual Report Download - page 50

Technology Group
The Technology Group, primarily consisting of the
Microelectronics Division, provides leading semiconductor
technology, packaging solutions and engineering technology
services to OEM customers and, although appropriately not
reported as external revenue, to the Systems Group. The
Microelectronics Division develops and manufactures prod-
ucts in three general categories:
Application Specific Integrated Circuits — The company man-
ufactures and tests customized semiconductor products for
customers. The customers design these customized product
solutions using IBM’s suite of design tools and portfolio of
intellectual property (IP), resulting in faster speeds to market
for the customers.
Foundry — Semiconductor customers provide IBM with
their product designs based upon the customer’s product IP.
Using the customer’s design, IBM provides a full suite of
semiconductor manufacturing and integrated supply chain
services to deliver the product to the customer.
Standard products — These are semiconductors that are man-
ufactured and designed primarily based upon IBM’s Power PC
platform. Minor customization is performed for customers.
In addition, Technology Group launched in 2002 its new
Engineering and Technology Services Division that provides
system and component design services, strategic outsourcing
of customers’ design teams, and technology and manufactur-
ing consulting services.
historical results
(dollars in millions)
for the year ended december 31: 2002 2001 2000
Hardware revenue $«27,456 $«30,593 $«34,470
Hardware cost 20,020 21,231 24,207
Gross profit $«««7,436 $«««9,362 $«10,263
Gross profit margin 27.1% 30.6% 29.8%
Hardware revenue declined 10.3 percent (11 percent at con-
stant currency) in 2002 versus 2001 and declined 11.2 percent
(8 percent at constant currency) in 2001 compared with 2000.
In 2002, Systems Group revenue declined 8.0 percent
(10 percent at constant currency) to $12,646 million from
2001, following a decrease of 3.2 percent in 2001 versus 2000.
Revenue from the majority of the Systems Group products
was affected by the continuing weak IT spending during
2002. zSeries revenue declined in 2002 following an increase
in 2001. Total deliveries of zSeries computing power increased
approximately 6 percent as measured in MIPS (millions of
instructions per second) versus 2001, while the price per MIP
continued to decline from 2000 through 2002. Revenue from
pSeries UNIX servers decreased in 2002 versus 2001 although
high-end pSeries server revenue increased in 2002 versus
2001. In November 2002 the company announced a new
mid-range p650 server with Power 4 engines, which gener-
ated strong demand. Revenue from pSeries servers declined
due to weak market conditions, although high-end server
revenue increased in 2001 versus 2000. Revenue from iSeries
servers declined in 2002 versus 2001 due to weak volumes
across all product lines. Revenue from iSeries servers also
declined in 2001 versus 2000. These declines in revenue were
partially offset by increased revenue from xSeries servers,
primarily in the high-end servers. The company expects to
have gained market share in xSeries servers in 2002 against
competitors. xSeries revenue declined in 2001 versus 2000,
reflecting the competitive environment in the Intel-based
server market.
Revenue from storage products decreased in direct access
storage device (DASD) and tape product lines in 2002 versus
2001 as the company experienced weakness in this business
consistent with general industry trends whereby the impact
of price declines exceeded the impact of volume growth as
measured in terabytes. In 2001, revenue increased primarily
as a result of higher revenue from high-end storage products
versus 2000.
Personal Systems Group revenue declined 7.8 percent
(9 percent at constant currency) in 2002 to $11,049 million
from 2001, following a decrease of 20.6 percent in 2001 versus
2000 with personal computers, retail stores solutions and
printer systems all showing declines. The personal computer
revenue decline was primarily driven by the continued
demand weakness and price erosion in the industry.
The Technology Group no longer includes HDDs and
comprises mainly the company’s Microelectronics Division
for all periods presented. Technology Group revenue in 2002
decreased 23.6 percent (23 percent at constant currency) to
$3,935 million when compared with 2001, following a
decrease of 0.7 percent in 2001 versus 2000. The decline in
Technology Group revenue was primarily a result of the
divestiture of multiple, non-core businesses over the past
twelve months, including display and card manufacturing.
These decreases were partially offset by increased revenue
from OEM logic products driven by demand for the com-
pany’s copper products and its growing foundry business.
The decline in 2001 revenue was primarily driven by the
severe slowdown in the semiconductor industry in 2001.
Hardware gross profit dollars decreased 20.6 percent in
2002 from 2001, following an 8.8 percent decrease in 2001
versus 2000. The Hardware gross profit margin decreased
3.5 points in 2002 following an increase of 0.8 points in 2001
versus 2000. The decline in gross profit dollars and gross
profit margin in 2002 was primarily driven by lower volumes
in the company’s microelectronics business and lower gross
profit margins on Systems Group products, primarily pSeries
and storage products, which more than offset the benefits
from hardware manufacturing infrastructure cost reductions.
The decline in gross profit dollars in 2001 was primarily
due to lower volumes in the company’s Technology Group
and pricing pressures in personal computers.
The increase in 2001 gross profit margin was primarily
driven by a shift in the company’s revenue toward servers from
lower gross profit margin products, such as personal computers.
Management Discussion
48 international business machines corporation and Subsidiary Companies