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31
Management Discussion
International Business Machines Corporation and Subsidiary Companies
Systems and Technology revenue decreased 6.9 percent (6 percent
adjusted for currency) in 2012 versus 2011. Adjusting for the divested
RSS business, revenue declined 5.1 percent (4 percent adjusted for
currency) in 2012. Growth markets revenue increased 0.3 percent
(1 percent adjusted for currency) in 2012, compared to the prior year
while major markets revenue decreased 8.3 percent (7 percent
adjusted for currency). During 2012, the company’s continued invest-
ments for innovation supported the introduction of the new System
z mainframe, the PureSystems offerings and new Storage and
POWER7+ products. In its introductory year, the company sold more
than 2,300 PureSystems in over 70 countries.
System z revenue increased 5.4 percent (6 percent adjusted for
currency) in 2012 versus 2011. The increase was driven by the new
mainframe which began shipping late in the third quarter. Fourth
quarter revenue increased 55.6 percent (56 percent adjusted for
currency), as revenue increased in the major markets over 50 per-
cent and over 65 percent in the growth markets. MIPS (millions of
instructions per second) shipments increased 19 percent in 2012
versus the prior year. The increase in MIPS was driven by the new
mainframe shipments, including specialty engines, which increased
44 percent year over year driven by Linux workloads. This is a good
indicator of new workloads moving to this platform. The performance
reflects the technology leadership and value of the vertically integrated
stack that the company’s flagship server is delivering to its clients.
Power Systems revenue decreased 8.5 percent (7 percent
adjusted for currency) in 2012 versus 2011. Low-end servers increased
6 percent (7 percent adjusted for currency) offset by declines in
high-end and midrange products. Early in October, the company
announced new POWER7+ based servers. The high-end and mid-
range models available in the fourth quarter performed well in the
period. The company will continue to refresh the Power portfolio in
the first half of 2013. In 2012, the company had nearly 1,200 competi-
tive displacements resulting in over $1 billion of business; almost
equally from Hewlett Packard and Oracle/Sun.
System x revenue decreased 3.7 percent (3 percent adjusted for
currency) in 2012 versus 2011. High-end System x revenue increased
5 percent (6 percent adjusted for currency) in 2012 versus the prior
year, while high-volume and blade servers declined year to year.
Storage revenue decreased 5.8 percent (4 percent adjusted for
currency) in 2012 versus 2011. Total disk revenue decreased 3 per-
cent (1 percent adjusted for currency) in 2012 versus 2011. Tape
revenue decreased 16 percent (14 percent adjusted for currency) in
2012 versus the prior year. The value in storage solutions continues
to shift to software, as demonstrated by the ongoing success the
company is having in its Tivoli storage software offerings.
Retail Stores Solutions revenue decreased 52.6 percent (52 per-
cent adjusted for currency) in 2012 versus 2011. In the third quarter,
the company divested the Retail Stores Solutions business to Toshiba
Tec. See the caption, “Divestitures,” on page 91 for additional infor-
mation regarding the transaction.
Microelectronics OEM revenue decreased 14.4 percent (14
percent adjusted for currency) in 2012 versus 2011.
($ in millions)
For the year ended December 31: 2012 2011
Yr.-to-Yr.
Percent/
Margin
Change
Systems and Technology
External gross profit $6,903 $7,555 (8.6)%
External gross profit margin 39.1% 39.8% (0.7) pts.
Pre-tax income $1,227 $1,633 (24.9)%
Pre-tax margin 6.7% 8.2% (1.5) pts.
The decrease in external gross profit in 2012 versus 2011 was due
to lower revenue and a lower overall gross profit margin.
Overall gross margin decreased 0.7 points in 2012 versus the
prior year. The decrease was driven by lower margins in System x
(0.6 points), Microelectronics (0.6 points), Storage (0.5 points) and
Power Systems (0.2 points), partially offset by improvement due to
revenue mix (1.2 points).
Systems and Technology’s pre-tax income decreased $406
million (24.9 percent) to $1,227 million in 2012, with a pre-tax margin
of 6.7 percent. Normalized for workforce rebalancing charges of
$46 million and $3 million in the third quarter of 2012 and 2011,
respectively, pre-tax income decreased 22.2 percent and the pre-
tax margin decreased by 1.3 points.
Global Financing
See pages 63 through 67 for an analysis of Global Financing’s
segment results.