IBM 2014 Annual Report Download - page 36

35
Management Discussion
International Business Machines Corporation and Subsidiary Companies
differentiation, such as solutions that address the strategic imper -
atives, there was good growth and gross margin performance.
However, in the more traditional parts of the portfolio, there was
continued price and profit pressure. The company will continue
to invest in the strategic imperatives and accelerate the transi-
tion to global delivery. Additionally, Global Process Services, the
business process outsourcing business, will be integrated with
GBS beginning in 2015 to create a seamless end-to-end business
transformation capability for clients.
Global Services Backlog
The estimated Global Services backlog at December 31, 2014
was $128 billion. This included a backlog reduction in 2014 of $3.7
billion associated with the customer care and industry standard
server divestitures. Adjusting for the divested businesses, backlog
was down 7.5percent as reported, but flatadjusted for currency
year to year. The estimated transactional backlog at December
31, 2014 decreased 7.6percent (1percent adjusted for currency)
from the December 31, 2013 levels. The estimated outsourcing
backlog decreased 11.0percent as reported, but increased 1per-
cent adjusted for the customer care divestiture (4points) and
currency (8points).
($ in billions)
At December 31: 2014 2013
Yr.-to-Yr.
Percent
Change
Yr.-to-Yr.
Percent Change
Adjusted for
Currency
Backlog
Total backlog $128.4 $142.8 (10.1)% (2.9)%
Adjusted for divested businesses (7.5) (0.2)
Outsourcing backlog 80.8 90.8 (11.0) (3.3)
Adjusted for customer care (7.1) 0.8
GTS gross profit margin increased 0.2points to 38.3percent in
2014. Pre-tax income decreased 9.2percent to $6,340 million and
the pre-tax margin declined 1.0points to 16.7percent compared
to the prior year. While there was a benefit from the pre-tax gain
of $202 million related to the customer care divestiture in 2014,
this benefit was offset by investments in areas like new resil-
iency centers, additional security skills and the SoftLayer cloud
hub expansion, plus the lost profit from the divested businesses.
Overall, the profit performance in GTS reflects the actions that
the company has taken to transform the business. The company
has invested in its strategic imperatives to accelerate growth,
continued to optimize its delivery platform through workforce
rebalancing and broader use of automation, and divested busi-
nesses, all impacting the year-to-year results. While these actions
all have near-term impacts to profit, they position the business
more effectively going forward and will enable it to deliver more
value to clients.
GBS gross profit margin of 30.8percent was flat year to
year compared to 2013. Pre-tax income decreased 6.7percent
to $2,999 million and the pre-tax margin declined 0.5points to
16.3percent. In 2014, profit was impacted by lower revenue on a
relatively fixed cost base. In areas where the company has strong
Total Global Services backlog includes GTS Outsourcing, ITS,
GBS Outsourcing, Consulting and Systems Integration and Main-
tenance. Outsourcing backlog includes GTS Outsourcing and GBS
Outsourcing. Transactional backlog includes ITS and Consulting
and Systems Integration. Total backlog is intended to be a state-
ment of overall work under contract and therefore does include
Maintenance. Backlog estimates are subject to change and are
affected by several factors, including terminations, changes in the
scope of contracts, periodic revalidations, adjustments for revenue
not materialized and adjustments for currency.
Global Services signings are management’s initial estimate of
the value of a client’s commitment under a Global Services con-
tract. There are no third-party standards or requirements governing
the calculation of signings. The calculation used by management
involves estimates and judgments to gauge the extent of a client’s
commitment, including the type and duration of the agreement,
and the presence of termination charges or wind-down costs.
Signings include GTS Outsourcing, ITS, GBS Outsourcing and
Consulting and Systems Integration contracts. Contract exten-
sions and increases in scope are treated as signings only to the
extent of the incremental new value. Maintenance is not included
in signings as maintenance contracts tend to be more steady state,
where revenues equal renewals.
Contract portfolios purchased in an acquisition are treated as
positive backlog adjustments provided those contracts meet the
company’s requirements for initial signings. A new signing will be
recognized if a new services agreement is signed incidental or
coincidental to an acquisition or divestiture.