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33
Management Discussion
International Business Machines Corporation and Subsidiary Companies
On an annual basis, approximately 70percent of the company’s
software business is annuity-like, including Software-as-a-Service
and subscription and support. Renewal rates are steady, the SaaS
business is growing, and overall annuity revenue grew for the full
year. Transactional revenue declined year to year as large clients
with multi-year contracts continued to utilize the flexibility the com-
pany has provided in deployment of their software. Outside the
company’s top 250 clients, software revenue increased low single
digits adjusted for currency on a year-to-year basis.
($ inmillions)
For the year ended December 31: 2015 2014
Yr.-to-Yr.
Percent/
Margin
Change
Software
External gross profi t $20,013 $22,533 (11.2)%
External gross profi t margin 87.3% 88.6% (1.3) pts.
Pre-tax income $ 9,066 $10,699 (15.3)%
Pre-tax margin 34.6% 37.0% (2.4) pts.
Software gross profit margin decreased 1.3points to 87.3percent.
Software pre-tax income of $9,066 million decreased 15.3percent,
with a pre-tax margin of 34.6percent, a decrease of 2.4points.
Profit performance for the year reflected the overall revenue trajec-
tory, a higher level of investments in areas such as Watson, Watson
Health, Watson IoT and Bluemix, and an impact from currency.
The company continues to transform and invest in the Software
business. Middleware serves the purpose of integrating different
environments, such as on premise and cloud. Key capabilities
have now been delivered on SoftLayer or as part of the Bluemix
platform to enable hybrid environments. The company’s middle-
ware remains the number one integration platform in the world and
now integrates across cloud environments. This allows clients’
existing applications to access the cloud, and new “born to the
cloud” applications to access clients’ existing assets.
The company is also adding substantial new capabilities to its
software and solutions portfolio, including The Weather Company
acquisition, which closed in January2016. This acquisition will
bring with it a high-volume platform that can ingest sensor data
at scale. The power of this platform is its ability to use Watson
cognitive capabilities to gather new insights by connecting data
at scale from multiple industry domains.
Systems Hardware
($ inmillions)
For the year ended December 31: 2015 2014
Yr.-to-Yr.
Percent
Change
Yr.-to-Yr.
Percent Change
Adjusted for
Currency
Systems Hardware external revenue $7,581 $9,996 (24.2)% 7.6%*
zSystems 28.1% 34.7%
Power Systems (0.4) 4.5
Storage (11.9) (7.0)
* Adjusted for the System x divestiture and currency.
Systems Hardware revenue of $7,581 million decreased 24.2per-
cent as reported, but grew 8percent year to year adjusted for
the divestiture of the Systemx business (28points) and currency
(4points) driven by zSystems and Power Systems. Systems
Hardware had a successful mainframe product cycle in 2015
and Power Systems grew as it was repositioned to address a
broader opportunity. The company continued to deliver innova-
tion to its systems to enable them to run the most contemporary
workloads. Approximately half of the Systems Hardware revenue
in 2015 was for solutions that address analytics workloads, or
hybrid and private clouds.