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ManagementDiscussion
INTERNATIONALBUSINESSMACHINESCORPORATION ANDSUBSIDIARYCOMPANIES
_33
• ImprovedmarginsinGlobalServicesdrivenprimarilyby
benefits from the company’s restructuring, productivity
initiatives and a better overall contractprofile.
Totalrevenueinthefourthquarterdeclined11.7percentas
reported(8.5percentdecline adjusted forcurrency).The com-
pany’srevenueprofilewassignificantlyimpactedbythe divesti-
ture ofthePersonalComputingbusinessinthesecondquarterof
2005—excluding the Personal Computing business, the com-
pany’s fourth-quarter 2004 total revenue was $24,703 million.
When compared to this revised amount, total revenue in the
fourth-quarter2005decreased1.1 percent(increased2.5percent
adjusted forcurrency)drivenbyadeclineinGlobalServices.
Thefollowingisananalysisoftheexternalsegmentresults.
Global Services revenue decreased 4.9 percent (0.9 per-
cent adjusted forcurrency).Thedeclinewasdrivenprimarilyby
weaknessinshort-termsigningsandadecreasein SO revenue.
Short-termsigningsweredown4percentandflatinthefourth
quarterandthirdquarter of2005,respectively,whencompared
with the same periods in 2004. Total SO signings declined 32
percentthisquarterandrevenuewasdown5.3percent.SOrev-
enue continues to be impacted by the high levels of backlog
erosionexperiencedin2004andthecumulativeeffectoflower
signingsstarting in2004 through the first quarter of 2005. ITS
revenue, excluding Maintenance, was down 5.4 percent and
signingsalsodeclinedthisquarter by 10percent. BCSrevenue
decreased 6.1 percent driven by declines in Asia Pacific and
Italy, while revenue in the Americas grew versus 2004. BCS
signingsincreasedby23percent,drivenbytheAmericasand
Europe, with significant growth (144 percent) in long-term
Business Transformation Outsourcing signings. Profitability
improved in Global Services as both gross margin (3.1 points)
and segment pre-tax (2.4points)margin increasedversus the
fourth quarter of 2004. Margin improvements were primarily
drivenbythe company’ssecond-quarterrestructuringactions,
improved resource utilization and a better contract profile.
GlobalServicessignings forthequarterwere $11.5 billion.
SystemsandTechnologyGrouprevenuegrew 6.3 percent
(9.8 percent adjusted for currency). zSeries server revenue
increased 5.5 percent, with strong MIPs growth of 28 percent
yeartoyear.zSeriesgrowthcontinuestobedrivenbynewwork-
loads,suchasLinuxandJava.iSeriesserverrevenuedeclined
18.2 percentas clients anticipatedtheearly2006announcement
of new POWER5+ products. pSeries server revenue grew 3.9
percent, driven by that brand’s POWER5+ product line refresh
whichbeganinthefourthquarter.xSeriesserversgrewvolumes
13percent,however,revenuewasflatduetocompetitivepricing
pressures. Blade Center product revenue grew 41.4 percent in
thequarter.Storageproductshadastrongquarterwithrevenue
growthof23.6percent,drivenbyTotaldisk(32.2percent)prod-
ucts. Microelectronics OEM revenue grew 48.1 percent year to
yearas300-millimeter-basedproducts,drivenbygameproces-
sors,grewover250percentversusthefourthquarter2004.
Software revenue increased 0.3 percent (3.3 percent
adjusted forcurrency).TheWebSpherefamilyof productsgrew
3.6 percent,whileInformationManagementsoftwareincreased
4.5percent,drivenbythecompany’scontentmanagementand
information integration product sets. Lotus revenue grew 1.6
percentandTivolirevenueincreased2.9percentdrivenbya17
percent growth in the brand’s storage software products.
Rational software revenue declined 2.0 percent—performance
wasgoodinAsiaPacificandEurope,butsome clients delayed
buying decisions in the Americas. In addition to the revenue
growth in the company’s key branded middleware, described
above, the profitability of the software business improved as
well,withthesegment’spre-taxmargingrowingby5.7pointsin
thefourthquarterversus2004.
GlobalFinancingrevenuedeclined 8.0 percent(5.6 percent
adjusted forcurrency)drivenprimarilyby lower client financing
revenueduetoadecliningassetbase,aswellaslowerexternal
usedequipment sales.
Thecompany’stotalgrossprofitmarginincreased 5.3points
inthefourth-quarter2005comparedtothefourth-quarter2004,
which included the divested Personal Computing business.
ExcludingthePersonal Computing business, thefourth-quarter
2004 gross profit margin was 41.9 percent, making the current
quarter’smargina2.2pointimprovementonacomparablebasis.
Total expense and other income decreased 7.4 percent
comparedtotheprior-yearperiod.Selling,generalandadmin-
istrativeexpensedecreased3.4percentyeartoyear,drivenpri-
marily by the divestiture of the Personal Computing business
andthecompany’srestructuringactions,offsetbya$267million
curtailment charge related to the announced changes in the
company’sU.S.definedbenefitpensionplans.RD&Eexpense
decreased 3.6 percent,whileIntellectualproperty andcustom
developmentincomealsodecreased23.7percentyeartoyear.
Other(income)andexpensewas$334millionofincomeinthe
fourthquarterof2005versus$4millionofincomeinthesame
periodlastyear. Thisimprovementwasdrivenbygains on cer-
tain real estate transactions (increase of $160 million) and the
favorableimpactofhedgingprograms(up approximately $150
million)versusthefourthquarterof2004.
Thecompany’s effectivetaxrate inthe fourth-quarter 2005
was 29.5 percent comparedwith 29.8 percent inthefourthquar-
ter of 2004. The nonrecurring pension curtailment charge
reduced thefourth-quarter2005effectivetaxrate by0.5points.
In the fourth quarter, the company recorded a $36 million
charge,netoftax,toreflectthe cumulativeeffectof a change
in accounting principle related to the adoption of FASB
Interpretation No. 47. See note B, “Accounting Changes,” on
pages61 and62 foradditionalinformation.
Sharerepurchasestotaledapproximately$1.0billioninthe
fourth quarter. The weighted-average number of diluted com-
monsharesoutstandinginthefourth-quarter2005was1,604.8
millioncomparedwith1,692.1 millioninthesameperiodof2004.
The company generated an increase of $1,395 million in
cashflow providedbyoperatingactivities.This increase reflects
theeffectsof prior-yearfundingoftheU.S.pensionplan($700
million) and improved inventory management ($327 million).
Also, net cash used in financing activities decreased signifi-
cantly—$2,417 million—primarily driven by a reduction in share
repurchasesinthequarterversusthefourth-quarter2004.