IBM 2003 Annual Report Download - page 62

The company’s Systems Group revenue grew 17.5 percent
(8 percent at constant currency) driven by zSeries main-
frames and xSeries servers. zSeries revenue increased due to
the successful introduction of the z990 products that
include additional memory capabilities, I/O channels,
processors and secure-key cryptography. zSeries volumes
increased 62 percent as measured in MIPS compared to the
2002 fourth quarter. xSeries revenues increased due to the
company’s successful blade strategy. Increased demand
drove higher revenue for pSeries and Storage. iSeries rev-
enue was generally flat.
Technology Group revenue declined 19.5 percent (20 per-
cent at constant currency) primarily driven by the impact of
divestitures in 2002. Personal Systems Group revenue
increased 15.9 percent (8 percent at constant currency) due
primarily to higher demand for personal computers, particu-
larly mobile products, as increased volumes more than offset
reductions in prices.
Software revenue increased 11.8 percent (2 percent at
constant currency) primarily due to continued strength in
demand for WebSphere, DB2Database and Tivoli middle-
ware products, as well as the acquisition of Rational.
Rational, acquired during the 2003 first quarter, surpassed
expectations and yielded 28 percent revenue growth over its
separately reported results for the 2002 fourth quarter.
Operating system revenue increased due to the favorable
impact of currency movements.
Global Financing revenue declined 11.5 percent (18 percent
at constant currency) due primarily to lower interest rates
and a lower average asset base. Given the unit’s annuity-like
business, lower originations in years prior to 2003 resulted in
lower revenue in 2003.
The company’s gross profit margin declined slightly and
was driven by declines in Global Services, Hardware and
Global Financing, partially offset by Software. In Global
Services, a 1.5 point decline was due to continued price pres-
sures given current industry demand, higher investment
costs associated with the early stages of an SO contract, and
the rescoping of several outsourcing contracts. In Hardware,
margins were flat in Systems Group and up in Technology
Group, offset by a 3 point decline in the Personal Systems
Group driven by increased warranty costs associated with
desktop products and industry-wide price declines. The
decline in Global Financing margins of 3 points was driven by
a mix change toward lower margin remarketing sales away
from financing income.
The decline in the company’s Total expense and other
income was due to the $574 million pre-tax charge primarily
associated with the fourth quarter 2002 acquisition of PwCC.
This decline was partially as offset by increases in expenses
attributable to the newly acquired businesses (primarily
Rational). The company’s expense-to-revenue ratio improved
by 3.9 points, of which 2.4 points were associated with the
absence in the 2003 fourth quarter of the pre-tax charge that
was incurred in the 2002 fourth quarter. The remaining
1.5 point improvement is associated with additional produc-
tivity and efficiency initiatives partially offset by the
increased expenses associated with the acquired businesses.
On specific expense items, retirement-related plans resulted
in $169 million of additional expense in the 2003 fourth
quarter due to the net impact of assumption changes and
contributions at year end 2002. The provision for doubtful
accounts was $144 million lower in the 2003 fourth quarter
due to the stabilization of the general economy and
specific client issues over the past twelve months.
The company’s 2003 fourth quarter effective tax rate
was 30.0 percent as compared to 29.5 percent in the 2002
fourth quarter.
Share repurchases totaled approximately $3.1 billion in
the fourth quarter. The weighted-average number of diluted
common shares outstanding in the quarter was 1,745.7 billion
compared with 1,728.7 billion in the 2002 fourth quarter,
higher by 17.0 million shares. The increased amount of
shares was driven primarily by additional diluted shares
related to the company’s higher share price compared with
the prior-year period, and additional shares issued in con-
junction with the company’s acquisition of PwCC and the
funding for the company’s PPP in the fourth quarter 2002,
offset by the company’s ongoing common share repurchase
program in the fourth quarter of 2003.
The company generated higher cash flows from opera-
tions in the 2003 fourth quarter as compared to the 2002
fourth quarter primarily due to the strong financial results
described above, as well as lower pension funding in the fourth
quarter of 2003 as compared to the fourth quarter of 2002.
The company also reduced capital expenditures as it com-
pletes the 300 millimeter semiconductor facility. Finally, the
company repurchased $3,069 million in shares during the
2003 fourth quarter ($3,010 million was settled in cash and
the remainder was reflected in accounts payable and will be
settled in 2004). This compared with $74 million in shares
repurchased during the 2002 fourth quarter.
Management Discussion
INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES
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