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ManagementDiscussion
INTERNATIONALBUSINESSMACHINESCORPORATION ANDSUBSIDIARYCOMPANIES
14_ ManagementDiscussion
RoadMap
The financial section of the International Business Machines
Corporation (IBM and/or the company) 2005 Annual Report,
consisting of this Management Discussion, the Consolidated
Financial Statements that follow and the notes related thereto,
comprises 89 pagesofinformation.ThisRoadMapisdesigned
toprovideyouwithsomeperspectiveregardingtheinformation
containedinthefinancialsection.
IBM’sBusinessModel
Thecompany’sbusinessmodelisbuilttosupporttwoprincipal
goals:helpingclientssucceedindeliveringbusinessvalueby
becoming more efficient and competitive through the use of
businessinsightandinformationtechnology(IT)solutions;and
providinglong-termvaluetoshareholders.Insupportofthese
objectives,thebusinessmodelhasbeendevelopedovertime
throughstrategicinvestmentsinservicesandtechnologiesthat
have the best long-term growth and profitability prospects
basedonthevaluetheydelivertoclients.Inaddition,thecom-
pany is committed to its employees and the communities in
whichitoperates.
The model is designed to allow for flexibility and periodic
rebalancing.In2005,16 acquisitionswerecompleted, primarily
insoftwareandservices,atanaggregatecostof approximately
$2billion,and thecompany completedthesaleof itsPersonal
Computing businesstoLenovoGroupLimited(Lenovo).
Thecompany’sportfolioofcapabilitiesrangesfromservices
that include Business Performance Transformation Services to
software, hardware, fundamental research, financing and the
component technologies used to build larger systems. These
capabilitiesarecombinedtoprovidebusinessinsightandsolu-
tionsintheenterprisecomputingspace.
Intermsoffinancialperformance, thecompanyhas contin-
uedto focuson its participation in the high-growth,high-profit
segments of the IT industry that will enable the company to
deliver consistently strong earnings, high returns on invested
capital and excellent cash flows. The company’s business
modelisbasedonabalancedportfolioofservices,systemsand
technologyandsoftwaremaintainingabroadrangeofcapabili-
tiesthatwillallowthecompanytocompeteeffectivelyandgrow
inkey marketsevenduringchangingeconomicenvironments.
Thisstrategyresultsinlessvolatilereturnsoverall,astheportfo-
liohasaneffectivesegmentationofbusinessesthatdrivetrans-
actional revenue and profits, as well as businesses that drive
annuity-basedrevenueandprofits.Thestrengthofthebusiness
modelisnotanysinglecomponent—itisthecompany’sabilityto
generateconsistentfinancialperformancewithbalancedcontri-
butionsacrosstheportfolio.
In terms of marketplace performance—i.e., the ability to
deliverclientvalue—itisimportanttounderstandthatthefunda-
mentalstrengthofthisbusinessmodelisnotfoundinthebreadth
oftheportfolioalone,butinthewaythecompanycreatesbusi-
nesssolutionsfromamongitscapabilitiesandrelationships.
Strategically, thecompanyhas exited commoditizedbusi-
nesses,increaseditsconcentrationinhigher-valuebusinesses
andcreatedamorebalancedportfolio.Thecompanyintegrates
across its portfolio to create solution offerings for its global
client-base,drivingprofitandcashgrowthoverthelong term.
Transparency
Transparencyisaprimarygoalofsuccessfulfinancialreporting.
The following are the key elements you will find in this year’s
AnnualReport.
• The company, in accordance with Section 404 of the
Sarbanes-OxleyActof2002,conductedanevaluationofits
internalcontrolover financialreportingandconcludedthat
theinternalcontroloverfinancialreportingwaseffectiveas
ofDecember31,2005.
• TheManagementDiscussionisdesignedtoprovidereaders
withaviewofthecompany’sresultsandcertainfactorsthat
mayaffectfutureprospectsfromtheperspectiveofthecom-
pany’s management. Within the “Management Discussion
Snapshot,”onpages15to17 thekeymessagesanddetails
willgivereaderstheabilitytoquicklyassessthemostimpor-
tantdriversofperformancewithinthisbriefoverview.
• TheManagementDiscussionreflectsthecompany’scontinued
andimprovingstrengthinproviding client- andindustry-spe-
cific solutions utilizingthebroadcapabilitiesofitsportfolio.
The sections on “Description of the Business” on page 17,
“Results of Continuing Operations” on page 22, “Financial
Position” on page 30, and “Looking Forward” on page 36,
areall writtenfromtheperspectiveoftheconsolidatedentity.
Detailedanalysisforeachofthecompany’ssegmentsisalso
includedandappearsonpages 27 to 30.
• GlobalFinancingisabusinesssegmentwithinthecompany
thatis measuredasifitwereastandaloneentity.Aseparate
“Global Financing” section beginning on page 43 is not
includedintheconsolidatedperspectivethatisreferredto
above.Thissectionisseparatelypresentedgiventhisseg-
ment’sunique impact on thecompany’s financialcondition
andleverage.
• The company divested its Personal Computing business
to Lenovo on April 30, 2005. The details of this significant
transaction are discussed in note C, “Acquisitions/
Divestitures,”onpages66and67.Asaresultofthisdivesti-
ture, the company’s reported financial results include four
months of activity for the Personal Computing business in
2005ascomparedto 12 monthsin2004.Thislackofcompa-
rable periods has a material impact on the company’s
reported revenue results. Therefore, in the Management
Discussion,withinthe“YearinReview” sectiononpages22
to 25, the company has presented an analysis of revenue
bothon an as-reportedbasisand on abasis that excludes
therevenuesfromthedivestedPersonalComputingbusiness
fromboththe2005and2004periods.Thecompanybelieves
that the analysis that excludes the Personal Computing
revenuesisabetterindicator ofthecompany’soperational
revenueperformancein2005ascomparedto2004.
• The selected reference to constant currency in the
Management Discussion is made so that the financial
results can be viewed without the impacts of changing