IBM 2006 Annual Report Download - page 38

Systems and Technology Group segment revenue was $7.1 billion
and increased 3.2 percent as reported (flat adjusted for currency), when
compared to the fourth quarter of 2005. System z revenue increased 4.5
percent, with MIPS volume growth of 6 percent year to year. System i
revenue declined 10.1 percent as sales of upgrades declined year to year
as customers continue to leverage their existing capability. Revenue
from System p grew 3.5 percent, driven by high-end server sales as
customers leverage the platform’s virtualization capabilities to consoli-
date multiple smaller servers into high-end servers. System x server
revenue increased 6.8 percent with growth in both EMEA and Asia
Pacific, partially offset by decreased revenue in the Americas as cus-
tomers continue to evaluate processor alternatives. Blades revenue was
essentially flat year over year, with growth in both EMEA and Asia
Pacific offset by a decline in the Americas. Storage products increased
9.3 percent, driven by growth in Total disk products of 11.8 percent.
Tape products increased 3.9 percent on the continued strength of the
new tape security offering. Microelectronics OEM revenue declined
5.6 percent when compared to a very strong fourth quarter of 2005.
Retail Store Solutions increased 24.9 percent as customers are replac-
ing older technology in favor of integrated retail solutions.
Software segment revenue of $5.6 billion, increased 14.4 percent
(11 percent adjusted for currency), reflecting strong demand for the
company’s industry-leading middleware capabilities. In the fourth
quarter, revenue from key branded middleware increased 25.1 percent
(21 percent adjusted for currency), with all of the five brands deliver-
ing double-digit growth. The growth came from both organic sources
and strategic acquisitions. The major acquisitions for the year of
FileNet, MRO and Micromuse contributed to the growth in the
Information Management and Tivoli brands. The WebSphere family
of software grew 21.8 percent, with continued strong performance
from Application Servers and Business Integration products.
Information Management software increased 27.9 percent, driven by
the company’s distributed relational database and information on
demand product sets. Lotus grew 29.7 percent, benefiting from
strong momentum in its Notes/Domino family of collaboration prod-
ucts and broad adoption of its enhanced version of Sametime, which
started shipping in the third quarter of 2006. Tivoli increased 25.4
percent with double-digit growth in Systems Management, Security
and Storage software. Rational increased 12.0 percent in a slower
growing market. In addition to the strong revenue growth in the
fourth quarter, the software segment had pre-tax profit of $2.0 billion,
an increase of 4.1 percent year to year. The pre-tax margin of 32.3
percent decreased 3.2 points versus 2005, primarily due to the inte-
gration of new acquisitions.
Global Financing revenue increased 2.9 percent (flat adjusted for
currency), driven primarily by client financing revenue due to an
increased average asset base.
The company’s consolidated gross profit margin was 44.6 percent in
the fourth quarter, compared with 44.1 percent in the year-ago period.
The increase of 0.5 points was driven primarily by improved margins
in services and a mix towards the higher margin software business.
Total expense and other income increased 11.1 percent compared
to the prior-year period. Selling, general and administrative expense
increased 7.0 percent (4 percent adjusted for currency), driven pri-
marily by investments the company made in its software and services
businesses, emerging markets and acquisitions. Partially offsetting
these increases was the year-over-year decline from the pre-tax curtail-
ment charge of $267 million related to pension changes recorded in
the fourth quarter of 2005. RD&E expense increased 8.8 percent in
the fourth quarter, driven partially by acquisitions with the remainder
reflecting the company’s ongoing investments to maintain technology
leadership across its products and services. Other (income) and
expense was $150 million of income, a reduction of $184 million (55.0
percent) versus the fourth quarter of 2005. In the prior year, gains on
real estate transactions were unusually high due to several large trans-
actions compared with current year real estate activity.
The company’s effective tax rate in the fourth-quarter 2006 was
28.0 percent compared with 29.5 percent in the fourth quarter of
2005. The 1.5 point decrease in the fourth-quarter 2006 tax rate was
primarily attributable to the net effect of several items in the quarter.
In 2006, the fourth-quarter tax rate was favorably impacted by the
settlement of the U.S. federal income tax audit for the years 2001
through 2003 as well as the retroactive reinstatement of the U.S.
research tax credit during the quarter. These benefits were partially
offset by the one-time tax cost associated with the intercompany
transfer of certain intellectual property, which also occurred in the
fourth quarter. In addition, the quarter also benefited from a more
favorable mix of income in lower tax jurisdictions.
Share repurchases totaled approximately $1.4 billion in the fourth
quarter. The weighted-average number of diluted common shares
outstanding in the fourth-quarter 2006 was 1,532.5 million compared
with 1,604.8 million in the same period of 2005.
The company generated $5,334 million in cash flow provided by
operating activities. This was driven primarily by net income and
continued focus on working capital. Net cash used in investing
activities of $5,634 million, increased significantly ($4,203 million)
versus the fourth quarter of 2005, driven primarily by increased
spending on acquisitions.
MANAGEMENT DISCUSSION
INTERNATIONAL BUSINESS MACHIN ES CORPORATION AND SUBSI DIARY COMPANIES
36 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 .......................................................
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