IBM 2012 Annual Report Download - page 42

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Management Discussion
International Business Machines Corporation and Subsidiary Companies
revenue growth in the quarter. First, GTS did a tremendous amount
of work to address a number of low margin contracts to improve the
profitability of the outsourcing portfolio. The benefits of that work were
realized in profit and margin performance, though it did have some
impact on revenue. In the fourth quarter, the impact was 1 point of
year-to-year revenue growth to GTS, and to Global Services in total.
Second, revenue from sales and volumes into existing base accounts
declined year to year in the fourth quarter. This activity tends to be
more transactional in nature and economically sensitive. The impact
of these factors are reflected in GTS Outsourcing revenue, which
decreased 3.1 percent (2 percent adjusted for currency) in the fourth
quarter. Outsourcing revenue in the growth markets increased 6.1
percent, 8 percent at constant currency, and the outsourcing backlog
in these markets was up 9 percent at constant currency. The backlog
growth reflects an ongoing trend as clients are building out their infra-
structures and scaling to meet the growth objectives of their
businesses. ITS revenue of $2,542 million increased 2.1 percent (3
percent adjusted for currency) in the fourth quarter with the growth
markets up 10.1 percent (10 percent at constant currency). GTS gross
profit increased 1.3 percent and the gross profit margin improved 1.1
points to 37.6 percent with margin improvement across all lines of
business. GTS fourth-quarter 2012 pre-tax income increased 5.0
percent to $2,027 million with the pre-tax margin expanding 1.2 points
to 19.2 percent, versus the fourth quarter of 2011. Margin expansion
resulted from increased efficiency and productivity from the focus on
automation and process, primarily through the company’s enterprise
productivity initiatives.
Global Business Services revenue of $4,720 million decreased
3.2 percent (2 percent adjusted for currency) in the fourth quarter
of 2012. From a geographic perspective, the growth markets
increased 2.0 percent (3 percent at constant currency) and Japan
improved 0.3 percent (6 percent at constant currency)—the second
consecutive quarter of revenue growth in Japan. The growth initia-
tives continued to drive strong performance with double-digit
revenue growth in business analytics, Smarter Planet and cloud
offerings in the quarter. Application Outsourcing revenue decreased
3.8 percent (2 percent adjusted for currency) and C&SI revenue
decreased 3.0 percent (2 percent adjusted for currency). GBS has
been taking actions to address the more traditional customized
packaged application work including: adding partners, increasing
sales capability and targeting and closing large transformational
opportunities in the growth markets. GBS gross profit decreased
1.0 percent in the fourth quarter with the gross profit margin expanding
0.7 points versus the prior year. GBS pre-tax income of $841 million
was essentially flat year to year with a pre-tax margin of 17.2 percent,
an improvement of 0.6 points. Improved utilization and improved
services delivery more than offset the impact from revenue.
Software
Software revenue of $7,915 million increased 3.5 percent (4 percent
adjusted for currency) in the fourth quarter with growth in all the key
brands, and particular strength and share gains in WebSphere,
Lotus and Rational. Key branded middleware revenue increased
5.4 percent (6 percent adjusted for currency) year to year and gained
share as the software business continued to be the leader in
the middleware market. The software business had continued
momentum across its brands in the growth initiatives in the fourth
quarter with strong performance in business analytics, Smarter
Commerce and cloud. WebSphere revenue increased 10.6 percent
(11 percent adjusted for currency) in the fourth quarter year to year
and gained share. The company continued to expand its portfolio
to capture the emerging opportunity around mobile computing and
had solid revenue growth in several of its core WebSphere offerings,
such as application servers and commerce in the fourth quarter.
Information Management revenue increased 2.2 percent (3 percent
adjusted for currency) and held share with strong performance in
Information Integration and predictive analytics, both driven by big
data. Tivoli revenue increased 4.3 percent (5 percent adjusted for
currency) and held share, led by its storage and security offerings.
Revenue from the storage portfolio increased 12 percent (13 percent
adjusted for currency), reflecting the continued value of storage
software. Tivoli security increased 16 percent (16 percent adjusted
for currency) driven by Q1 Labs. Lotus revenue increased 8.6 per-
cent (9 percent adjusted for currency) and gained share as the Lotus
portfolio continues to transform to the faster-growing social busi-
ness offerings. Revenue growth was driven by strong performance
from the existing social business offerings and the recent acquisition
of Kenexa, which closed in December 2012. Kenexa helps clients
create a more efficient and effective workforce, and brings a unique
combination of cloud-based technology and consulting services to
an already extensive portfolio of social business solutions. Rational
revenue increased 11.6 percent (12 percent adjusted for currency) in
the fourth quarter and gained share. Growth was driven by double-
digit growth in both analysis, modeling and design software and the
Automated Software Quality business. Software gross profit
increased 4.5 percent and the gross profit margin expanded 0.8
points to 90.6 percent. Software delivered pre-tax income of $4,017
million in the fourth quarter, a growth of 8.3 percent compared to
the fourth quarter of 2011, with a pre-tax margin of 46.0 percent, up
2.4 points.
Systems and Technology
Systems and Technology revenue of $5,763 million decreased 0.7
percent (1 percent adjusted for currency); adjusted for the RSS
divestiture, revenue increased 3.6 percent (4 percent adjusted for
currency). Performance was driven by the company’s new main-
frame and momentum in PureSystems—the company’s new
expert integrated systems. System z revenue increased 55.6 per-
cent (56 percent adjusted for currency) driven by the first full
quarter of the new mainframe product. MIPS shipments increased
66 percent year to year; the largest quarter of MIPS shipments in
history. Approximately half of these MIPS were specialty engines,
which were up over 80 percent year to year driven by Linux work-
loads. Revenue growth in System z was over 50 percent in the
major markets and over 65 percent in the growth markets. In the
growth markets, the company had strong sales to established as
well as new mainframe customers. Power Systems revenue
decreased 18.9 percent (19 percent adjusted for currency),
although both the new POWER7+ midrange and high-end Power
servers performed well in the quarter. In the fourth quarter, the
company had over 350 competitive displacements resulting in over
$335 million of business; approximately half of which came from