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ManagementDiscussion
INTERNATIONALBUSINESSMACHINESCORPORATION ANDSUBSIDIARYCOMPANIES
34_ ManagementDiscussion
PriorYearinReview
(Dollars andshares inmillionsexceptpershareamounts)
YR. TOYR.
FOR THEYEARENDEDDECEMBER31: 2004 2003 CHANGE
Revenue $«««96,293 $«««89,131 8.0% *
Grossprofitmargin «36.9% «36.5% 0.4 pts.
Totalexpenseand
otherincome $«««24,900 $«««23,130 7.7%
Totalexpenseandother
income-to-revenueratio 25.9% 26.0% (0.1) %
Incomefromcontinuing
operationsbefore
incometaxes $«««10,669 $«««««9,417 13.3%
Provisionforincometaxes $«««««3,172 $«««««2,829 12.1%
Incomefromcontinuing
operations $«««««7,497 $«««««6,588 13.8%
Lossfromdiscontinued
operations $««««««««««18 $««««««««««30 (41.3) %
Earningspershare of
commonstock:
Assumingdilution:
Continuingoperations $«««««««4.39 $«««««««3.76 16.8%
Discontinuedoperations ««««««(0.01) ««««««(0.02) (39.8) %
Total $«««««««4.38 $«««««««3.74 17.1%
Weighted-averageshares
outstanding:
Assumingdilution 1,707.2 1,752.8 (2.6) %
Assets** $«111,003 $«106,021 4.7%
Liabilities** $«««79,315 $«««76,490 3.7%
Equity** $«««31,688 $«««29,531 7.3%
* 3.4percent adjusted for currency.
** AtDecember31
of the economy and continued market share gains for
zSeries, xSeries and pSeries server products, as well as
increasedrevenueforpersonalcomputers
• Continued demand growth in emerging countries (up over
25percent)andinBPTS(upapproximately45percent)
• Favorableimpactofcurrencytranslation
Revenuefromallindustrysectorsincreasedin2004whencom-
paredto2003,reflectingthecompany’sbroadcapabilitiesand
industry-specificsolutionswhichcombinetechnologyandhigh-
valueservicestosolveaclient’sbusinessorITproblems.These
solutions also provide for a longer-term relationship with the
client, rather than a transaction-oriented sale. The Financial
Services sector revenue growth of 9.3 percent was led
by Financial Markets (15 percent), Banking (9 percent) and
Insurance(8percent).TheCommunicationssectorhadrevenue
growth of10.4 percent with growth in Telecommunications (15
percent), while the Distribution sector revenue growth was 7.5
percent, led by the Retail Industry (12 percent). The Small &
Mediumbusinesssectorrevenueincreased8.3percentasthe
companycontinuedtorolloutnewproductsundertheExpress
labelthataredesignedandpricedspecificallyfor clients inthe
100to1,000employeesegment.
Revenue across all geographies increased in 2004 when
compared to 2003. In the Americas, U.S. (6 percent) and
Canada(9percent)revenuegrewasdidLatinAmerica(12per-
cent),notablyBrazil,whichgrewat15percent.
Within Europe/Middle East/Africa, Eastern Europe, the
Nordiccountries,Spain(7percent)andFrance(3percent)had
revenuegrowth,whiletheU.K.(2percent),Germany(3percent)
andItaly(8percent)declined whenadjusted forcurrency.Asia
Pacifichadstronggrowthin2004,ledbyChina,whichgrewat
25 percent, and the ASEAN region (17 percent), while Japan,
which is about 60 percent of Asia Pacific’s revenue, also had
growth of 5 percent. Collectively, as a result of the company’s
targetedinvestments,theemergingcountriesofChina,Russia
(75percent),India(45percent)andBrazilhadrevenuegrowth
over25percentin2004toover$4.0billioninrevenue.
OEMrevenueincreasedin2004versus2003dueprimarily
to continued strong growth in the company’s E&TS business
and improved operational performance in the Microelectron-
icsbusiness.
Thefollowingisananalysisofexternalsegmentresults.
GLOBAL SERVICES
Global Services revenue increased 8.4 percent (3.1 percent
adjustedforcurrency).SOrevenuegrew 12.8 percentandcon-
tinuedtodemonstrateitscompetitiveadvantageindeliveringon
demand solutions by leveraging both its business transforma-
tionalskills and scale during2004.Eachgeography continued
year-to-yeargrowth,withsevenconsecutivequartersofdouble-
digit growth in Europe/Middle East/Africa, excluding currency
benefits.WithinSO,e-businessHostingServices,anofferingthat
providesWebinfrastructureandapplicationmanagementasan
Internet-basedservice,continueditspatternofrevenuegrowth.
ITSrevenue,whichexcludesMaintenance,increased4.8percent
ContinuingOperations
In2004,thecompanydemonstratedthatitcouldextenditslead-
ershipinagrowthenvironment.Thecompanydeliveredrevenue
growthof8.0percentanddilutedearningspersharegrowthof
16.8percent.Theincreaseinthecompany’sIncomefromcontin-
uingoperationsanddilutedearningspersharefromcontinuing
operationsascomparedto2003wasprimarilydueto:
• Improvingdemandassociatedwiththemoderateexpansion
oftheeconomyandcontinuedmarketsharegainsforzSeries
andxSeriesserverproducts
• Continued operational improvements in the Microelec-
tronicsbusiness
• Continueddemandgrowthinemergingcountries
• Favorableimpactofcurrencytranslation
Theincreaseinrevenuein2004ascomparedto2003waspri-
marilydueto:
• ImproveddemandinGlobalServicesandkeyindustrysectors
• Improvingdemandassociatedwiththemoderateexpansion