IBM 2014 Annual Report Download - page 65

64 Management Discussion
International Business Machines Corporation and Subsidiary Companies
OTHER INFORMATION
Looking Forward
The company measures the success of its business model over
the long term, not any individual quarter or year. The company’s
strategies, investments and actions are all taken with an objective of
optimizing long-term performance. A long-term perspective ensures
that the company is well-positioned to take advantage of major
shifts occurring in technology, business and the global economy.
Within the IT industry, there are major shifts occurring—driven
by data, cloud and changes in the ways individuals and enterprises
are engaging. In 2014, the company had strong performance in
its strategic imperatives that are focused on these market shifts.
Revenue from the company’s cloud, analytics, mobile, social and
security solutions together increased 16percent compared to
2013, including the impacts of currency and the divested indus-
try standard server business. In total, the strategic imperatives
generated $25 billion in revenue, approximately 27percent of
total consolidated revenue, including software content that rep-
resented a higher percentage than the overall company. As a
result, the strategic imperatives deliver gross profit margins that
are better than the consolidated gross profit margin on average.
In 2014, the company continued to take significant actions to drive
the shift towards its strategic imperatives with targeted invest-
ments, as well as moving away from areas that do not support the
strategic profile.
The company’s strategic direction is clear and compelling, and
the company has been successful in shifting to the higher value
areas of enterprise IT. The strong revenue growth in the strategic
imperatives confirms that, as does the overall profitability of the
business. The company expects the industry to continue to shift.
The company expects revenue from its strategic imperatives to
continue to grow at a double-digit rate. These offerings are as high
value as other parts of the business, which continue to manage cli-
ents’ most critical business processes. As the cloud business gets
to scale, and with ongoing productivity improvements across the
business, the company expects to have an opportunity to expand
margin. In addition, the company expects to continue to allocate
its capital efficiently and effectively to investments, and to return
value to its shareholders through a combination of dividends and
share repurchases. Over the longer term, in considering the oppor-
tunities it will continue to develop, the company expects to have
the ability to generate low single-digit revenue growth, and with a
higher value business mix, high single-digit operating (non-GAAP)
earnings per share growth, with free cash flow realization in the
90’spercent range. This is a longer term growth trajectory, not an
absolute end point or a multi-year objective.
In the near term, there are a few dynamics that are incon-
sistent with that longer term trajectory. Specifically, in 2015, the
company will be managing certain transitions in the business. As
an example, while it is fully participating in the shift to cloud, the
margins in that business are impacted by the level of investment
the company is making, and the fact that the business is not yet
at scale. The company expects an improvement in margin in 2015
as the business ramps, but, it will not yet be at scale. In addition,
the company expects a continued impact to its software transac-
tion revenue growth, as customers continue to utilize the flexibility
that the company has provided to them, as they commit to the
company’s platform for the longer term. There are also cyclical
considerations. Given the geographic breadth of the business, the
company has seen challenges in some of its markets—notably
many of the growth markets. The company continues to believe
that these are important markets over time, and it continues to
invest to capture these opportunities. However, the company is
not expecting a robust demand environment in many geographies
in 2015. The company also expects a continued impact from cur-
rency in 2015. At January 2015 spot rates, the impact to revenue
growth is expected to be 5–6points, but, as with all companies
with a similar global business profile, with the dollar strengthen-
ing, the company also expects that currency will have a significant
translation impact on its profit growth. The company also expects
some cyclical benefits in 2015, including the new mainframe
product cycle and a full year of POWER8 availability.
Overall, looking forward to 2015, the company expects to con-
tinue to grow in many areas of the business. It expects to deliver
strong growth in the strategic imperatives and margin expansion,
while continuing a high level of investment and hiring, shifting
to areas that have the best opportunity. However, in the current
currency environment, and considering the impact from the
completed divestitures, total revenue as reported is not expected
to grow in 2015. The company expects to have less workforce
rebalancing charges in 2015 versus 2014, and while it may have
certain gains, it does not expect to replicate the $1.8 billion of gains
recorded in 2014, resulting in a net impact to profit growth. Overall,
the company expects GAAP earnings per share from continuing
operations for 2015 to be in the range of $14.35 to $15.10, and oper-
ating (non-GAAP) earnings per share to be in the range of $15.75
to $16.50. For the first quarter of 2015, the company expects mid
single-digit earnings per share growth from continuing operations
compared to the first quarter of 2014, primarily driven by the large
workforce rebalancing charge that was taken in the prior year.
Overall, and most importantly, the company expects to exit 2015
with a higher-value, higher-margin business.
Within the company’s earnings per share expectation for
2015, the company is expecting a 2–3 point benefit from share
repurchases—less than the impact in 2014. The company enters
2015 with approximately $6.3 billion of repurchase authorization
remaining, and the company is assuming it will utilize the majority
of the remaining authorization in 2015. The timing of repurchases
will determine the final impact to earnings per share in 2015.
From a segment perspective, the company expects that the
launch of the new mainframe, along with the success in POWER8
that the company experienced in the fourth quarter of 2014, will
generate momentum in 2015. As a result, excluding the impact
of divestitures, the company expects Systems and Technol-
ogy to deliver revenue growth in the mid-single digits in 2015.
Within Global Services, the company has not assumed a revenue