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Management Discussion
International Business Machines Corporation and Subsidiary Companies
Global Services
In the fourth quarter of 2015, the Global Services segments,
GTS and GBS, delivered combined revenue of $12,422 million, a
decrease of 8.1percent as reported and 1percent adjusted for cur-
rency. Combined pre-tax income in the fourth quarter decreased
0.1percent year to year and the pre-tax margin increased 1.3points
to 17.2percent.
Global Technology Services revenue of $8,126 million de-
creased 7.1percent as reported, but grew 1percent adjusted
for currency. This was the third consecutive quarter of revenue
growth, adjusted for currency and divestitures. Outsourcing rev-
enue of $4,262 million decreased 9.1percent as reported and
1percent adjusted for currency. ITS revenue of $2,360 million
decreased 2.6percent as reported but grew 5percent adjusted
for currency. Maintenance revenue of $1,505 million decreased
8.0percent as reported but was flat adjusted for currency.
Within GTS, strategic imperatives including hybrid cloud ser-
vices grew strong double digits in the fourth quarter adjusted for
currency. This included strong demand for SoftLayer which again
grew double digits on an adjusted basis. The company continues
to expand its cloud capabilities through acquisitions including
Gravitant, Inc. and Clearleap, Inc. announced in the fourth quarter
of 2015.
The GTS gross profit margin decreased 1.5points to 37.7per-
cent in the fourth quarter of 2015 compared to prior year. This
decline was driven by investments in cloud data centers and the
acceleration of new contracts, which generally have lower up-front
margins. In the fourth quarter, pre-tax income increased 4.5per-
cent to $1,486 million and pre-tax margin was up 1.9points to
17.8percent. The margin increase was driven by lower workforce
rebalancing charges and savings from actions taken throughout
the year to drive efficiency in the delivery model. These savings
were offset by higher investment as the company continues to
invest to contemporize clients IT systems, transforming them
into digital enterprises. The company is scaling its cloud foot-
print with 46cloud centers opened around the world. Currency
also continued to impact margin in the fourth quarter and was
the largest impact on year-to-year profit growth given the strong
dollar environment.
Global Business Services revenue of $4,297 million decreased
9.9percent as reported and 4percent adjusted for currency in the
fourth quarter of 2015 compared to the prior year. GBS outsourc-
ing revenue of $1,223 million decreased 9.7percent as reported
and 4percent adjusted for currency. C&SI revenue of $3,074 mil-
lion declined 10.0percent as reported and 4percent adjusted for
currency.
Revenue continued to be impacted by the company’s shift
away from traditional enterprise application implementations as
clients move from these engagements to initiatives that focus on
digitizing their business with analytics, cloud and mobile tech-
nologies. Revenue from the strategic imperatives within the GBS
segment increased double digits adjusted for currency in the
fourth quarter compared to the prior year.
The GBS gross profit margin decreased 3.3points to 28.2per-
cent in the fourth quarter compared to the prior year. Pre-tax
income decreased 8.6percent to $708million and pre-tax margin
was up 0.2points to 16.0percent. Current year benefit from lower
workforce rebalancing charges was offset by the impact of price
pressure in declining areas of the business and continued invest-
ment in analytics, cloud and mobility practices. In addition, the
company is investing to scale a new cognitive consulting practice
that is focused on helping clients unlock the transformative value
of cognitive business.
Within Global Services, the company has continued momen-
tum in services offerings that modernize clients’ IT systems and
move their operations into the cloud-based mobile world.
Software
In the fourth quarter of 2015, Software revenue of $6,767 million
decreased 10.7percent as reported and 6percent adjusted for
currency compared to the prior year period. Annuity content grew
year to year, but transactional content declined. Key branded mid-
dleware revenue of $4,858 million, which accounted for 72percent
of total software revenue in the fourth quarter, decreased 10.4per-
cent as reported and 6percent adjusted for currency with declines
across all brands. Within key branded middleware, WebSphere
decreased 9.2percent (5percent adjusted for currency), Infor-
mation Management decreased 10.2percent (5percent adjusted
for currency), Tivoli decreased 5.8percent (1percent adjusted for
currency), Workforce Solutions decreased 9.9percent (4percent