IBM 2014 Annual Report Download - page 50

49
Management Discussion
International Business Machines Corporation and Subsidiary Companies
value, are recent examples of this. ITS revenue of $2,423 million
decreased 1.6percent from the fourth quarter of the prior year as
reported, but increased 4percent adjusted for currency. The year-
to-year increase was driven largely by the company’s high-value
security, mobility and resiliency offerings. SoftLayer continues to
attract new workloads to the platform, and in October, the com-
pany announced that IBM was selected by SAP to be the global
cloud provider for their enterprise cloud solution. IBM’s ability to
integrate public and private workloads within its hybrid cloud was
a critical differentiator for SAP. The company has continued to
expand its datacenter footprint and in the fourth quarter opened
cloud centers in Melbourne, Paris, Mexico City, Tokyo and Frank-
furt. Maintenance revenue of $1,635 million decreased 9.2percent
as reported, but was up 1percent for the quarter, adjusted for
currency (6points) and the industry standard server divestiture
(4points). The GTS gross profit margin of 38.5percent decreased
0.3points in the fourth quarter of 2014 compared to prior year.
In the fourth quarter, pre-tax income decreased 26.4percent
to $1,464 million and the pre-tax margin declined 3.9points to
15.6percent compared to the prior year. The year-to-year decrease
was driven by several key factors. First, GTS lost profit on a year-to-
year basis as a result of the customer care and industry standard
server divestitures. Second, the fourth quarter workforce rebalanc-
ing charge of $277 million impacted profit. Finally, the company
continued to invest in both offerings and operational capabilities.
This includes targeted investments in mobility, security and cloud
which complement clients’ systems-of-record, as well as opera-
tional improvements such as the yield from the rebalancing action
taken earlier in the year, and more broadly deployed automation in
the delivery centers.
Global Business Services revenue of $4,349 million decreased
8.4percent (3percent adjusted for currency) in the fourth quarter
of 2014. Consulting and Systems Integration revenue of $3,416
million declined 8.6percent (3percent adjusted for currency)
in the fourth quarter. Revenue was down in the traditional back
office implementations, particularly in North America. However,
the company again had strong double-digit growth in its practices
that address cloud, analytics, mobile and security. Through its
partnership with Apple, the company released the first 10 Mobile-
First for iOS solutions in the fourth quarter. GBS Outsourcing
revenue of $933 million decreased 7.5percent (2percent adjusted
for currency) in the fourth quarter, reflecting sequential improve-
ment at constant currency compared to the third quarter of 2014.
However, performance continued to be impacted by a challenging
pricing environment.
The GBS gross profit margin of 32.0percent expanded
1.4points in the fourth quarter of 2014 compared to prior year,
which is a good indicator of the value its offerings deliver. Pre-tax
income decreased 22.0percent to $733 million including a 15point
impact from the workforce rebalancing charge, which will pay back
in 2015. Pre-tax margin declined 2.7points to 16.4percent com-
pared to the prior year. Although the company continued to see a
slowdown in back office implementations in the traditional parts
of the portfolio, it is investing in strategic partnerships and those
should yield benefits in 2015.
Software
Software revenue of $7,578 million decreased 6.9percent (3per-
cent adjusted for currency) in the fourth quarter compared to the
prior year. Middleware decreased 5.6percent (2percent adjusted
for currency), while operating systems were down 18.8percent
(16percent adjusted for currency). As expected, there was not a
change in trajectory in the fourth quarter and performance was
similar to the previous quarter. Total growth reflected a headwind
from operating systems, driven by the divestiture of the indus-
try standard server business and Power Systems results. It also
reflected business model changes, which impacted transaction
revenue growth as customers continue to use the flexibility that
has been provided in the deployment of software purchased
through enterprise licensing agreements. This flexibility enables
clients to optimize their capacity on the company’s platform for
the long term. There was solid growth in many of the solution
areas, including security, mobile and cloud. Security software
again grew at a double-digit rate, marking the ninth consecu-
tive quarter of double-digit growth. With cybersecurity threats as
one of the key issues that all customers are facing, the company
has brought its analytics, big data, research IP, mobile and cloud
capabilities together to create security offerings to address this
market opportunity. The company’s software mobile offerings
more than doubled in the quarter, as it leveraged the integrated
MobileFirst portfolio, and software-as-a-service offerings were
up nearly 50percent.
Key branded middleware revenue, which accounted for
72percent of total Software revenue in the fourth quarter of
2014, decreased 6.4percent (3percent adjusted for currency)
compared to the prior year. Within key branded middleware, Web-
Sphere revenue decreased 6.4percent (4percent adjusted for
currency). Information Management revenue decreased 9.1per-
cent (6percent adjusted for currency). Tivoli revenue decreased
2.4percent, but was up 1percent adjusted for currency driven
by security software. Workforce Solutions revenue decreased
12.1percent (8percent adjusted for currency). Rational revenue
increased 4.1percent (10percent adjusted for currency) in the
fourth quarter with improved year-to-year performance compared
to the earlier quarters of 2014.
The Software gross profit margin remained strong at 90.0per-
cent in the fourth quarter compared to 90.5percent in fourth
quarter of the prior year. Software pre-tax income of $3,765 mil-
lion in the fourth quarter decreased 11.2percent year to year,
with a pre-tax margin of 44.7percent, a decline of 2.3points. The
fourth quarter of 2014 included a workforce rebalancing charge
of $120 million that represented approximately 3points of the
year-to-year decline.