IBM 2006 Annual Report Download - page 32

(Dollars in millions)
YR. TO YR.
FOR THE YEAR ENDED DECEMBER 31: 2006 2005 CHANGE
Global Services:
Gross profit $, $, .%
Gross profit margin .% .% . pts.
Global Services gross profit dollars increased primarily due to the
benefits from productivity initiatives and cost efficiencies, including
benefits resulting from the company’s targeted restructuring action in
the second quarter of 2005. Gross profit margin improvement was
achieved in each of the services lines of business.
GLOBAL SERVICES SIGNINGS
In 2006, total Global Services signings increased 4 percent year to
year to $49,174 million, driven by a 6 percent increase in shorter term
signings and a 4 percent increase in longer term signings. Global
Technology Services signings were $29,608 million and Global
Business Services signings were $19,565 million in 2006. The compa-
ny’s total Global Services backlog increased to an estimated $116
billion from the 2005 estimated backlog of $111 billion.
(Dollars in millions)
FOR THE YEAR ENDED DECEMBER 31: 2006 2005
Global Technology Services Signings
Longer term* $, $,
Shorter term* , ,
Total $, $,
Global Business Services Signings
Longer term* $ , $ ,
Shorter term* , ,
Total $, $,
* Longer term contracts are generally 7 to 10 years in length and represent SO and
BTO contracts as well as GBS contracts with the U.S. federal government and its
agencies and AMS for custom and legacy applications. Shorter term are contracts
generally three to nine months in length and represent the remaining GBS offer-
ings of Consulting and Systems Integration, AMS packaged applications and ITS
contracts. These amounts have been adjusted to exclude the impact of year-to-year
currency changes.
Global Services signings are management’s initial estimate of the
value of a client’s commitment under a Global Services contract.
Signings are used by management to assess period performance of
Global Services management. There are no third-party standards or
requirements governing the calculation of signings. The calculation
used by management is an approximation of constant currency, and
involves estimates and judgments to gauge the extent of a client’s
commitment, including the type and duration of the agreement, and
the presence of termination charges or wind-down costs. For example,
for longer term contracts that require significant up-front investment
by the company, the portions of these contracts that are counted as a
signing are those periods in which there is a significant economic
impact on the client if the commitment is not achieved, usually
through a termination charge or the client incurring significant wind-
down costs as a result of the termination. For shorter term contracts
that do not require significant up-front investments, a signing is usu-
ally equal to the full contract value.
Signings include SO, BTO, ITS and GBS contracts. Contract
extensions and increases in scope are treated as signings only to the
extent of the incremental new value. Maintenance is not included in
signings as maintenance contracts tend to be more steady state, where
revenue equal renewals, and therefore, the company does not think
they are as useful a predictor of future performance.
Backlog includes SO, BTO, ITS, GBS, and Maintenance. Backlog
is intended to be a statement of overall work under contract and
therefore does include Maintenance. Backlog estimates are subject to
change and are affected by several factors, including terminations,
changes in the scope of contracts, periodic revalidations, adjustments
for revenue not materialized and currency assumptions used to
approximate constant currency.
Contract portfolios purchased in an acquisition are treated as
positive backlog adjustments provided those contracts meet the
company’s requirements for initial signings. A new signing will be
recognized if a new services agreement is signed incidental or coinci-
dent to an acquisition.
Hardware
(Dollars in millions)
YR. TO YR.
FOR THE YEAR ENDED DECEMBER 31: 2006 2005 CHANGE
Hardware segment revenue: $, $, (.)%
Systems and Technology
Group $, $, .%
System z .
System i (.)
System p (.)
System x .
System Storage .
Microelectronics .
Engineering &
Technology Services (.)
Retail Store Solutions .
Printing Systems (.)
Personal Computing Division — , NM
NM—Not meaningful
MANAGEMENT DISCUSSION
INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES
30 2006 Annual Report
Management Discussion ........................................................
Road Map ............................................................................. 
Forward-Looking and Cautionary Statements ..................... 
Management Discussion Snapshot ...................................... 
Description of Business ....................................................... 
Year in Review...................................................................... 
Prior Year in Review ............................................................. 
Discontinued Operations ..................................................... 
Other Information ................................................................ 
Global Financing .................................................................. 
Report of Management .........................................................
Report of Independent Registered Public Accounting Firm ....
Consolidated Statements .......................................................
Black
MAC
2718 CG10