IBM 2015 Annual Report Download - page 23

21
Management Discussion
International Business Machines Corporation and Subsidiary Companies
In the area of engagement, revenue increased 64percent as
reported and 77percent adjusted for currency. Security revenue
increased 5percent as reported (12percent adjusted for cur-
rency), mobile revenue more than tripled year to year and social
revenue increased 14percent as reported (21percent adjusted
for currency).
From a segment perspective, Global Services revenue
declined 10.5percent as reported and 1percent adjusted for
currency (9points) and divestitures. Global Technology Services
(GTS) declined 9.7percent as reported, but increased 1percent
year to year adjusted for currency (10points) and the Systemx
divestiture with strong growth in the strategic imperatives on
an adjusted basis. Global Business Services (GBS) revenue
decreased 12.0percent as reported and 4percent adjusted for
currency (8points). GBS revenue continues to be impacted by
the shift away from traditional large enterprise application imple-
mentations. Software revenue declined 9.8percent as reported
and 4percent adjusted for currency with growth in annuity-based
revenue, including Software-as-a-Service (SaaS), more than
offset by declines in transactional revenue reflecting the flexi-
bility the company has provided to its largest enterprise clients.
Systems Hardware revenue decreased 24.2percent as reported,
but increased 8percent adjusted for the Systemx divestiture
(28points) and currency (4points), reflecting a successful main-
frame cycle in 2015 and the repositioning of Power Systems to
address a broader opportunity.
From a geographic perspective, revenue in the major markets
declined 9.9percent as reported and 1percent adjusted for cur-
rency (8points) and divestitures (2points) with growth in Germany,
Japan and the UK on an adjusted basis. Growth markets revenue
decreased 18.4percent as reported and 3percent adjusted for
currency (9points) and divestitures (6points). On an adjusted
basis, declines in Asia Pacific were partially offset by growth in
Latin America and Middle East and Africa.
The consolidated gross profit margin of 49.8percent
decreased 0.2points year to year. The operating (non-GAAP)
gross margin of 50.8percent increased 0.2points compared to
the prior year primarily driven by the shift to higher value through
portfolio actions and the relative strength of zSystems, partially
offset by margin declines in Global Services and Software.
Total expense and other (income) decreased 6.4percent in
2015 compared to the prior year. Total operating (non-GAAP)
expense and other (income) decreased 7.8percent compared to
2014. The key year-to-year drivers were:
Total Operating
Consolidated (non-GAAP)
• Currency* (9) points (9) points
• Systemx divestiture (2) points (2) points
• Divestiture gains 6 points 6 points
• Workforce rebalancing (3) points (3) points
* Reflects impacts of translation and hedging programs.
The reduction in expense was driven primarily by currency
impacts, a lower level of workforce rebalancing charges and the
impact of the divested Systemx business. These benefits were
partially offset by the impact of lower divestiture gains ($1.6billion)
year to year. The reduction in operating (non-GAAP) expense was
driven primarily by the same factors. The company is continuing
to shift resources and spending within its operational expense
base—driving productivity and efficiency in some areas while
increasing investment in support of the strategic imperatives. In
2015, the company shifted over $5billion of spending across cost,
expense and capital expenditures, to the strategic imperatives.
Pre-tax income from continuing operations of $15.9billion in
2015 decreased 20.2percent year to year and the pre-tax margin
was 19.5percent, a decrease of 2.0points. The continuing oper-
ations effective tax rate for 2015 was 16.2percent, a decrease
of 5.0points versus 2014. The tax rate in 2015 reflected benefits
from the settlement of the U.S. tax audit and geographic mix of
pre-tax profits, partially offset by less utilization of foreign tax cred-
its. Income from continuing operations of $13.4billion decreased
15.2percent and the net income margin was 16.3percent, a
decrease of 0.6points versus 2014. Losses from discontin-
ued operations, net of tax, were $174million in 2015 compared
to $3,729 million in 2014. Net income of $13.2billion increased
9.7percent year to year. Operating (non-GAAP) pre-tax income
from continuing operations decreased 16.3percent year to year
and the operating (non-GAAP) pre-tax margin from continu-
ing operations decreased 1.1points to 21.6percent. Operating
(non-GAAP) income from continuing operations of $14.7billion
decreased 12.2percent including an impact of 7points from the
2014 gains from the Systemx and customer care divestitures. The
operating (non-GAAP) income margin from continuing operations
of 17.9percent decreased 0.1points. The operating (non-GAAP)
effective tax rate from continuing operations in 2015 was 17.2per-
cent versus 21.0percent in 2014. The 2015 profit and margin
performance reflect portfolio actions taken as the company shifts
to higher value, as well as investments being made to add capa-
bilities to drive the transformation.
Diluted earnings per share from continuing operations of $13.60
in 2015 decreased 12.8percent year to year. In 2015, the company
repurchased 30.3million shares of its common stock at a cost of
$4.7billion. Operating (non-GAAP) diluted earnings per share of
$14.92 decreased 9.7percent versus 2014 including an impact
of 7points from the 2014 gains from the Systemx and customer
care divestitures. Diluted earnings per share from discontinued
operations was ($0.18) in 2015 compared to ($3.69) in 2014.