IBM 2002 Annual Report Download - page 52

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Management Discussion
50 international business machines corporation and Subsidiary Companies
The company develops software building blocks that may
be used in multiple products to satisfy a wide range of cus-
tomer needs. This has led to efficiencies, cost savings in the
production of code, and improved time to market with new
offerings. The increase in gross profit dollars and gross
profit margin in 2001 versus 2000 was primarily due to
higher Software revenue, lower service costs and purchased
vendor software, partially offset by higher amortization costs
and vendor royalty payments.
looking forward
The company purchased Rational on February 21, 2003 for
approximately $2.1 billion in cash. Rational provides software
tools that allow users to effectively capture and analyze
requirements to create designs for software applications, test
applications, and manage the software development process.
Rational’s software development tools can be used to develop
and upgrade any other company’s software products.
Accordingly, this acquisition is a critical part of IBM’s open
standard strategy. Rational’s revenue for the fiscal year ended
March 31, 2002, was $690 million.
Major IBM customers are embracing the Linux operating
system. Prior to open standard operating systems, a cus-
tomer may have been more likely to purchase middleware
from the software vendor that owns and sells the proprietary
operating system used by that customer. An open standard
operating system gives customers another reason to consider
IBM middleware.
Enterprise Investments/Other
description of business
The Enterprise Investments segment develops and provides
industry-specific information technology solutions supporting
the Hardware, Software and Global Services segments of the
company. Primary product lines include product life cycle
management software and document processing technologies.
Product life cycle management software primarily serves the
industrial sector and helps customers manage the development
and manufacturing of their products. Document processor
products service the financial sector and include products that
enable electronic banking.
historical results
(dollars in millions)
for the year ended december 31: 2002 2001 2000
Enterprise Investments/
Other revenue $«1,064 $«1,153 $«1,404
Enterprise Investments/
Other cost 611 634 747
Gross profit $««««453 $««««519 $««««657
Gross profit margin 42.6% 45.0% 46.8%
Enterprise Investments/Other revenue decreased 7.7 per-
cent (10 percent at constant currency) from 2001, following a
decrease of 17.9 percent (14 percent at constant currency) in
2001 from 2000. The decrease in 2002 revenue was primarily
a result of lower revenue from document processors, partially
offset by increased revenue from product life-cycle manage-
ment software. The company’s strategy has been to shift
development and distribution of certain products to third-
party companies.
The gross profit dollars from Enterprise Investments/
Other declined 12.6 percent in 2002 versus 2001 and
decreased 21.0 percent in 2001 versus 2000. The Enterprise
Investments/Other gross profit margin declined 2.4 points in
2002 following a decrease of 1.8 points in 2001 versus 2000.
The declines in gross profit dollars and margins primarily
relate to software as well as industry dynamics.
looking forward
The key factors that will impact the results of the Enterprise
Investments segment are the economy and corporate IT
spending budgets.
Expense and Other Income
(dollars in millions)
for the year ended december 31: 2002 2001 2000
Selling, general and
administrative $«18,738 $«17,048 $«17,393
Percentage of revenue 23.1% 20.5% 20.4%
Research, development
and engineering 4,750 4,986 5,084
Percentage of revenue 5.9% 6.0% 6.0%
Intellectual property
and custom
development income (1,100) (1,476) (1,664)
Other (income) and expense 227 (353) (990)
Interest expense 145 234 344
Total expense and
other income $«22,760 $«20,439 $«20,167
selling, general and administrative expense
Historical Results
Total Selling, general and administrative (SG&A) expense
increased 9.9 percent (9 percent at constant currency) in
2002 versus 2001, following a decrease of 2.0 percent (flat at
constant currency) in 2001 compared with 2000. The increase
in 2002 was due to actions taken in the second quarter and
fourth quarter of 2002 totaling $1,489 million. See note s,
“2002 Actions,” on pages 90 through 92 for additional details
regarding these actions.