IBM 2006 Annual Report Download - page 44

MANAGEMENT DISCUSSION
INTERNATIONAL BUSINESS MACHIN ES CORPORATION AND SUBSI DIARY COMPANIES
42 2006 Annual Report
access to markets, with local management teams who understand the
clients and their challenges and who can respond to these opportuni-
ties with value-add solutions.
In emerging markets, the company will continue to invest for
revenue growth and leadership. The company has had good success in
the emerging markets of China, India, Russia and Brazil. These coun-
tries have been among the fastest growing IT markets in the world,
and the company expects them to continue to grow at a rate greater
than the worldwide IT growth rate for several years.
As a globally integrated enterprise, the company will continue to
leverage the skills and capabilities of its global infrastructure and work-
force. The company’s global scale provides a base to leverage its invest-
ments and continue to focus on increased productivity and efficiency
in the coming year. In 2006, the company expanded its global delivery
centers—improving its services delivery to clients—and significantly
increased its resources in service delivery centers. Going forward, the
company will also continue the global integration of its internal sup-
port functions with a continued objective of increased productivity.
With respect to technology, in 2006, the company was awarded
more U.S. patents than any other company for the fourteenth year in
a row. The company remains committed to technology leadership and
will continue to focus internal development investments on high-
value, high-growth opportunities and to broaden its ability to deliver
client and industry solutions.
The company will also continue to selectively pursue acquisitions
to grow its capabilities. The company has a targeted acquisition strat-
egy and has developed the ability to efficiently acquire, integrate and
accelerate new product and service offerings. In addition, the com-
pany will continue to evaluate underperforming and less strategic
areas of its portfolio.
The company’s continued investments in Software have led to this
segment’s emergence as a strong source of revenue growth and the
largest contributor to the company’s profit in 2006. The company’s
Software is differentiated in the industry by both the strength of its
individual products and the breadth of the software offerings. The key
to the company’s continued Software growth stems from the ability to
maintain and grow this industry-leading software business. The com-
pany expects to accomplish this through a combination of internal
development and strategic acquisitions. These products will be rapidly
developed and integrated to bring continued value to clients.
In addition, continued Software growth is also dependent on the
company’s ability to bring these technologies to market effectively,
leveraging its worldwide sales and marketing capabilities. The com-
pany will continue to invest in sales and marketing resources, targeting
the faster growing regions, sectors and technologies in the industry.
Finally, growth is fueled by the rapid deployment of these technolo-
gies in client accounts. The company’s unique ability to combine
Software, Services and Hardware into robust customer solutions
increases the rate of Software deployment, leading to higher loyalty
rates and improved Software annuity streams.
Within the Global Services business, revenue growth improved
over the course of the year and the company saw results from the
targeted actions and investments it has made the past two years. The
Integrated Technology Services business is improving after rebalanc-
ing its offerings and resources. Global Business Services significantly
improved profitability. The company will continue to make invest-
ments in sales, delivery and business development across its services
offerings. The company will also continue to optimize its resources
and processes to increase productivity and improve flexibility and
scalability. The key to future success in Services will come from the
company’s ability to integrate its business globally, leverage both local
and global skills and effectively use technology to create solutions that
deliver value and cost savings for clients.
The company’s Systems and Technology Group is the leader in
servers. Through continued development investment, the company
introduced POWER5+, extended virtualization capabilities and pro-
vided leading technology for all major game platforms in 2006. Going
forward, the company will focus its investments on differentiating
technologies with high-growth potential including POWER6, blades,
high-performance computing and energy efficiency. In the Micro-
electronics business, the company anticipates that game processor
demand will continue to moderate through the first half of 2007 given
the seasonality of the consumer segment.
As discussed in note X, “Subsequent Events,” on page 115, the
company will form a joint venture with Ricoh based on the company’s
Printing Systems Division and initially have a 49 percent ownership
interest in the joint venture. This transaction is expected to close in
the second quarter of 2007, and the company will continue to operate
this business in the normal course until the closing.
The company expects 2007 pre-tax retirement-related plan expense
to increase approximately $100 million when compared to 2006. This
expected year-to-year change is primarily driven by an increase in the
cost of defined contribution plans. The cost of defined benefit plans
is estimated to be essentially flat year to year as increases due to
changes in the actuarial assumptions (used to determine 2007 expense)
will be offset by expected savings due to better-than-expected 2006
return on asset performance. The actual return on the U.S. Personal
Pension Plan (PPP) assets for 2006 was 15 percent.
Pre-tax stock-based compensation expense declined $189 million in
2006, compared to 2005. The company expects stock-based compensa-
tion expense to decline in 2007, when compared to 2006. The anticipated
decline is expected to be less than $100 million on a pre-tax basis.
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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