IBM 2012 Annual Report Download - page 29

2828 Management Discussion
International Business Machines Corporation and Subsidiary Companies
Global Technology Services revenue of $40,236 million in 2012
decreased 1.6 percent as reported, but increased 1 percent adjusted
for currency year to year. Revenue growth from the backlog was
partially offset by a decline in revenue from new signings and a
decrease in sales in existing accounts. Revenue performance was
led by the growth markets which were up 5.0 percent (9 percent
adjusted for currency). GTS Outsourcing revenue decreased 2.4
percent as reported, but increased 1 percent adjusted for currency
in 2012. Outsourcing revenue from the growth markets increased
2.4 percent (7 percent adjusted for currency), as the outsourcing
offerings help clients build out their IT infrastructures. Integrated
Technology Services (ITS) revenue increased 1.0 percent (4 percent
adjusted for currency) in 2012 compared to 2011, and continued
to be led by strength in the growth markets which increased 10.3
percent (13 percent adjusted for currency).
Global Business Services revenue of $18,566 million decreased
3.7 percent (2 percent adjusted for currency) in 2012. On a geographic
basis, solid performance in the growth markets, with revenue up
4.3 percent (8 percent adjusted for currency), was offset by a
5.1 percent decline (3 percent adjusted for currency) in the major
markets. The growth initiatives—business analytics, Smarter Planet
and cloud had solid double-digit revenue growth, and represented
over one-third of total GBS revenue in 2012. As GBS shifts more of
its business to higher value content, these larger, more complex
engagements are having a positive effect on the GBS backlog.
The GBS backlog grew for the fourth consecutive year at constant
currency—although the backlog is mixing to longer duration engage-
ments. Application Outsourcing revenue decreased 4.1 percent
(2 percent adjusted for currency) in 2012 year to year, and Consulting
and Systems Integration (C&SI) revenue decreased 3.6 percent
(2 percent adjusted for currency). Both GBS lines of business had
solid revenue performance year to year in the growth markets with
Application Outsourcing and C&SI up 1.5 percent and 5.3 percent,
respectively, as reported, and up 6 percent and 8 percent, respec-
tively, at constant currency.
($ in millions)
For the year ended December 31: 2012 2011
Yr.-to-Yr.
Percent/
Margin
Change
Global Services
Global Technology Services
External gross profit $14,740 $14,320 2.9%
External gross profit margin 36.6% 35.0% 1.6 pts.
Pre-tax income $ 6,961 $ 6,284 10.8%
Pre-tax margin 16.8% 14.9% 1.9 pts.
Global Business Services
External gross profit $ 5,564 $ 5,545 0.3%
External gross profit margin 30.0% 28.8% 1.2 pts.
Pre-tax income $ 2,983 $ 3,006 (0.8)%
Pre-tax margin 15.5% 15.0% 0.5 pts.
GTS gross profit increased 2.9 percent in 2012 and the gross profit
margin improved 1.6 points year to year with margin expansion
in each line of business, led by Outsourcing. Pre-tax income of
$6,961 million in 2012 increased 10.8 percent year to year and the
pre-tax margin expanded 1.9 points to 16.8 percent. Normalized for
workforce rebalancing charges of $151 million and $5 million in the
third quarter of 2012 and 2011, respectively, GTS pre-tax income was
up 13.1 percent and pre-tax margin expanded 2.2 points. The year-
over-year gross and pre-tax margin expansion was driven by several
factors: the work done to improve the profitability of a number of low
margin contracts in the outsourcing portfolio, increased contribution
from the higher margin growth markets, and increased efficiency
and productivity from the focus on automation and process primarily
through the company’s enterprise productivity initiatives.
The GBS gross profit margin expanded 1.2 points, led primarily
by improved profit performance in Application Outsourcing. GBS
pre-tax income of $2,983 million declined 0.8 percent in 2012 with
a pre-tax margin of 15.5 percent, an improvement of 0.5 points year
to year. Normalized for workforce rebalancing charges of $113 million
and $5 million in the third quarter of 2012 and 2011, respectively,
GBS pre-tax income was up 2.8 percent and the pre-tax margin
expanded 1.1 points. The gross and pre-tax margins benefitted from
improved service delivery and yield from the company’s enterprise
productivity initiatives.
The total Global Services business delivered strong profit and
margin expansion throughout 2012. Pre-tax income of $9,944 million
in 2012 increased 7.0 percent year to year. Normalized for the higher
level of workforce rebalancing charges in 2012, pre-tax income was
up 9.8 percent and the pre-tax margin expanded 1.9 points com-
pared to the prior year.
Global Services Backlog
The estimated Global Services backlog at December 31, 2012 was
$140 billion, a decrease of 0.3 percent as reported, but an increase
of 1 percent adjusted for currency compared to the December 31,
2011 balance, and an increase of 1.9 percent (3 percent adjusted for
currency) compared to the September 30, 2012 balance. Revenue
generated from the backlog is approximately 70 percent of total
services annual revenue in any year, with the remainder coming from
transactional signings in the year, and sales and volumes into the
existing client base. In 2013, the projected total services revenue
from the backlog is expected to be up 1 percent year to year at
consistent foreign currency exchange rates. This includes 2 percent
growth from the run out of the opening backlog and a 1 percent
impact from the work done to restructure a number of lower margin
contracts in the outsourcing business. Despite the impact to revenue
growth, these restructured contracts have improved the profitability
of the backlog. These contracts provided year-to-year profit
improvement in 2012. This impact, which will carryforward to 2013,
will contribute modest profit growth in 2013 off this higher profit
base, with the gross profit coming from the backlog more represen-
tative of a 2 percent backlog growth versus a 1 percent growth.
The total estimated growth markets backlog at December 31,
2012 increased 13.6 percent (15 percent adjusted for currency) year
to year. The estimated transactional backlog at December 31, 2012
increased 8.7 percent (9 percent adjusted for currency) and the
estimated outsourcing backlog decreased 3.3 percent (2 percent
adjusted for currency), respectively, from the December 31, 2011 levels.