IBM 2007 Annual Report Download - page 16

Management Discussion
International Business Machines Corporation and Subsidiary Companies
14
Road Map
The financial section of the International Business Machines Cor-
por ation (IBM or the company) 2007 Annual Report, consisting
of this Manage ment Discussion, the Consolidated Financial
Statements that follow and the notes related thereto, comprises 109
pages of information. This Road Map is designed to provide the
reader with some perspective regarding the information contained
in the financial section.
IBM’s Business Model
The company’s business model is built to support two principal
goals: helping clients succeed in delivering business value by becom-
ing more innovative, efficient and competitive through the use of
business insight and information technology (IT) solutions; and,
providing long-term value to shareholders. The business model has
been developed over time through strategic investments in capabilities
and technologies that have the best long-term growth and profit-
ability prospects based on the value they deliver to clients. The
company’s strategy is to focus on the high-growth, high-value seg-
ments of the IT industry.
The company’s global capabilities include services, software,
hardware, fundamental research and financing. The broad mix of
businesses and capabilities are combined to provide business insight
and solutions for the company’s clients.
The business model is flexible, and allows for periodic change
and rebalancing. The company has exited commoditizing businesses
like personal computers and hard disk drives, and strengthened its
position through strategic investments and acquisitions in emerging
higher value segments like service oriented architecture (SOA) and
Information on Demand. In addition, the company has transformed
itself into a globally integrated enterprise which has improved overall
productivity and is driving investment and participation in the
world’s fastest growing markets. As a result, the company is a higher-
performing enterprise today than it was several years ago.
The business model, supported by the company’s long-term
financial model, enables the company to deliver consistently strong
earnings, cash flows and returns on invested capital in changing eco-
nomic environments.
Transparency
Transparency is a primary goal of successful financial reporting.
The following are several key points for the reader of this year’s
Annual Report.
U The company, in accordance with Section 404 of the Sarbanes-Oxley Act
of 2002, conducted an evaluation of its internal control over financial
reporting and concluded that the internal control over financial reporting
was effective as of December 31, 2007.
U The Management Discussion is designed to provide readers with a view
of the company’s results and certain factors that may affect future pros-
pects from the perspective of the company’s management. Within the
“Management Discussion Snapshot,” on pages 16 and 17, the key mes-
sages and details will give readers the ability to quickly assess the most
important drivers of performance within this brief overview.
U In the first quarter of 2007, the company changed the presentation of
revenue and cost in the Consolidated Statement of Earnings to reflect the
categories of Services, Sales and Financing. Previously, the presentation
included Global Services, Hardware, Software, Global Financing and an
Other category. In the past, these categories were aligned with the com-
pany’s reportable segment presentation of external revenue and cost.
However, as the company moves toward delivering solutions which bring
integrated software and services capabilities to its clients, the alignment
between segments and categories will diverge. Therefore, there are situ-
ations where the Global Services segments could include software revenue,
and conversely, the Software segment may have services revenue. The
change was made to avoid possible confusion between the segment revenue
and cost presentation and the required category presentation in the
Consolidated Statement of Earnings. The change only impacts the format
for the presentation of the company’s revenue and cost in the Consolidated
Statement of Earnings and does not reflect any change in the company’s
reportable segment results or in the company’s organizational structure.
The periods presented in this Annual Report are reported on a comparable
basis. The Management Discussion and Analysis of revenue and gross
profit from continuing operations will focus on the segment view, as this
is how the business is managed and is the best reflection of the company’s
operating results and strategy.
U On January 29, 2008, IBM International Group Capital LLC, an
indirect, wholly owned subsidiary of the company, issued $3.5 billion of
18-month floating rate notes. The proceeds will be utilized to reduce the
364-day bridge loan associated with the 2007 accelerated share repur-
chase (ASR). (See pages 31 and 32 for additional information.) In the
Consolidated Statement of Financial Position included in the company’s
press release and Form 8-K filing on January 17, 2008, the company
classified the $3.5 billion related to the 364-day bridge loan as Short-term
debt. As a result of this refinancing in January, and consistent with the
Management Discussion ............................ 14
Road Map.................................................... 14
Forward-Looking and
Cautionary Statements ............................... 15
Management Discussion Snapshot ..................16
Description of Business ....................................17
Year in Review ..................................................23
Prior Year in Review ........................................37
Discontinued Operations .................................42
Other Information ............................................42
Global Financing ..............................................50
Report of Management ....................................56
Report of Independent Registered
Public Accounting Firm ...................................57
Consolidated Statements ..................................58
Notes .................................................................64