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ManagementDiscussion
INTERNATIONALBUSINESSMACHINESCORPORATION ANDSUBSIDIARYCOMPANIES
_25
revenuedeclined,MIPS(millionsofinstructionspersecond)vol-
umesincreased7percentin2005versus2004.
PersonalComputingDivisionrevenuedecreasedasaresult
of the company divesting its Personal Computing business
toLenovo.The2005resultshavefourmonthsofrevenueversus
12 months of revenue in 2004. See note C, “Acquisitions/
Divestitures,” onpages 66 to 67 foradditionalinformation.
Softwarerevenue increased in 2005 versus2004 driven by
growthinthecompany’skeybrandedMiddlewareofferings,par-
tiallyoffsetbylowerOperatingSystemsrevenue.TheMiddleware
revenue growth was driven by Tivoli software offerings, the
WebSpherefamilyofproducts andLotussoftwareofferings.
Global Financing revenue declined due to a continued
decline in the income-generating asset base and yields. See
pages 43 through 47 for additional information regarding
GlobalFinancing.
The following table presents each revenue category as a
percentageofthecompany’stotal:
FORTHEYEAR ENDEDDECEMBER31: 2005 2004
GlobalServices 52.0% 48.0%
Hardware 26.7 32.3
Software 17.3 15.7
GlobalFinancing 2.6 2.7
EnterpriseInvestments/Other 1.4 1.3
Total 100.0% 100.0%
margin improvement and permitted the company to improve
pricecompetitivenessinkeymarkets.Inaddition,anincreasein
retirement-relatedplancostsofapproximately$648 million par-
tiallyoffsetbyadecreaseinstock-basedcompensationcostsof
approximately $133 million compared to 2004 also impacted
overallsegmentmargins.See“Segment Details”discussionon
pages 27 to 30 forfurtherdetailsongrossprofit.
Totalexpenseandotherincomedecreased2.4percent(2.9per-
cent adjusted for currency) in 2005 versus 2004. Overall, the
decrease was primarily due to the gain associated with the
divestiture ofthePersonalComputingbusiness ($1,108million),
againfromalegalsettlement withMicrosoft($775million) par-
tiallyoffsetbyincrementalrestructuringcharges ($1,706 million)
recordedinthesecondquarterof2005.Theexpense-to-revenue
ratio increased 0.8 points to 26.7 percent in 2005, as revenue
declined5.4percentandexpensedeclined2.4percentin2005
versus2004.Foradditionalinformationregardingthedecrease
inTotalexpenseand otherincome,seethefollowing analyses
bycategory:
SELLING,GENERALANDADMINISTRATIVE(SG&A)
(Dollarsinmillions)
YR. TOYR.
FORTHEYEARENDEDDECEMBER31: 2005 2004* CHANGE
Selling,generaland
administrativeexpense:
Selling,generaland
administrative—base $«16,845 $«16,690 0.9%
Advertisingand
promotionalexpense 1,284 1,335 (3.8)
Workforcereductions—ongoing 289 397 (27.2)
Restructuring 1,475 —NM
Retirement-relatedexpense 846 610 38.7
Stock-basedcompensation 606 914 (33.7)
Baddebtexpense (31) 133 (123.3)
Total $«21,314 $«20,079 6.1%
* Reclassifiedtoconformwith2005presentation.
NM—NotMeaningful
Total SG&A expense increased 6.1 percent (5.7 percent
adjustedforcurrency).Theincreasewasprimarilydrivenbythe
restructuringchargesrecordedin thesecondquarterof2005.
Seenote R,“2005 Actions” onpages 80 and81 foradditional
information.Inaddition,retirement-relatedexpensesincreased
in2005.Seethe“Retirement-RelatedBenefits” captiononpage
27 foradditionalinformation.Theseincreaseswerepartiallyoff-
setbyloweroperationalexpensesasaresultoftherestructuring
GROSS PROFIT
YR. TOYR.
FORTHEYEARENDEDDECEMBER31: 2005 2004 CHANGE
GrossProfitMargin:
GlobalServices 25.9% 24.2% 1.7 pts.
Hardware 35.1 29.5 5.6
Software 87.5 87.2 0.3
GlobalFinancing 54.7 59.9 (5.2)
EnterpriseInvestments/Other 46.5 40.2 6.3
Total 40.1% 36.9% 3.2 pts.
EXPENSE
(Dollarsinmillions)
YR. TOYR.
FORTHEYEARENDEDDECEMBER31: 2005 2004 CHANGE
Totalexpenseand
otherincome $«24,306 $«24,900 (2.4) %%
ExpensetoRevenue(E/R) 26.7% 25.9% 0.8 pts.
TheincreaseinGlobalServicesgrossprofitmarginwasprima-
rily due to benefits from the restructuring actions taken in the
secondquarterof2005,improvedutilization/productivityanda
betteroverallcontractprofile.TheincreaseinHardwaremargin
wasprimarilyduetothe divestiture ofthePersonalComputing
business(whichhadalowergrossprofitmarginthantheother
hardwarebusinesses)inthesecondquarterof2005.Thissale
contributed 3.8 points to the increase in the 2005 margin.
Microelectronics’ marginsincreasedduetoimprovingyields.
ThedecreaseinGlobalFinancinggrossprofitmarginwas
driven by declining financing margins primarily due to the
changing interest rate environment and a mix towards lower
marginremarketingsales.
The cost savings generated by the company’s continuing
focusonsupply-chaininitiativesalsocontributedtotheoverall