IBM 2015 Annual Report Download - page 52

50 Management Discussion
International Business Machines Corporation and Subsidiary Companies
The company has a set of strategic imperatives for growth that
are focused on the market shifts in data, cloud and engagement.
The model for these combined strategic imperatives is to deliver
double-digit revenue growth. In 2014, revenue from cloud, ana-
lytics, mobile, social and security solutions combined, increased
16percent with double-digit growth in each quarter. In total, the
strategic imperatives generated $25billion in revenue, which
represented approximately 27percent of total revenue. Business
analytics revenue of $17billion increased 7percent year to year
with growth led by the consulting business, as the company helped
clients extract value from their data. Cloud revenue of $7billion
was up 60percent year to year as client demand grew for high-
er-value cloud solutions across public, private and hybrid clouds.
Cloud delivered as-a-Service revenue increased approximately
75percent to $3billion in 2014, and exited the year with an annual
run rate of $3.5billion. Cloud revenue also includes the compa-
ny’s foundational offerings where it provides software, hardware
and services to clients to build private clouds. In engagement, the
mobile business more than tripled year to year with strong growth
in MobileFirst driven by the integrated portfolio of offerings. Secu-
rity revenue increased 19percent year to year.
The company continued to shift its investments and resources
to the strategic imperatives and solutions that address clients’
most critical needs. During 2014, the company spent approxi-
mately 6percent of revenue in research and development and
invested approximately $4billion on capital investments—support-
ing actions in a number of areas that will yield financial benefits in
the future. For example:
• Launched Bluemix, the company’s cloud Platform-as-a-
Service for the enterprise.
• Invested to globally expand the SoftLayer cloud datacenters.
• Invested to bring Watson’s capabilities to the enterprise and
to build a partner ecosystem, effectively creating a market for
cognitive computing.
• Introduced cloud application innovations around Watson
Analytics and Verse.
• Launched POWER8, and building the OpenPOWER
consortium.
• Formed a partnership with Apple for enterprise mobility, with
Twitter for big data, and with SAP and Tencent for cloud.
The recurring core franchises include the annuity businesses, and
the highly recurring portions of the transactions business, such as
mainframe revenue from the largest clients. This content has annu-
ity characteristics, and in many cases, it supports mission-critical
processes for clients. The model for these combined businesses
is to have stable revenue, with improving margins. In 2014, reve-
nue was down approximately 3percent with a modest decline in
margin. The decline was primarily driven by the mainframe product
cycle and currency.
The company’s high-value transactional businesses include
project-based work in services, transactional software, Power
Systems and Storage—in areas other than the strategic imper-
atives. The objective for these businesses is to optimize the
business model and maintain margins. In 2014, revenue declined
year to year, with gross margins over 40percent. Performance
reflected the secular challenges faced in some parts of the hard-
ware business.
In 2014, the company divested businesses that no longer fit
its strategic profile—Systemx and the customer care business
process outsourcing services and it announced the divestiture of
the Microelectronics business. These three businesses generated
approximately $7billion of revenue when reported in 2013, but
had a pre-tax loss of approximately $500million. The divestitures
reduce revenue but improve the company’s profit profile, consis-
tent with the shift to higher value.
From a segment perspective, Global Services revenue declined
3.5percent as reported, but increased 1percent adjusted for the
divestitures (2points) and currency (2points). Global Technology
Services declined 0.8percent as reported, but increased 2per-
cent adjusted for currency (2points) and divestitures with growth
in outsourcing and ITS on an adjusted basis. Global Business
Services revenue decreased 8.0percent and 1percent adjusted
for divestitures (5points) and currency (2points). Software reve-
nue declined 1.9percent (1percent adjusted for currency). Total
middleware revenue was flat as reported, but increased 1percent
at constant currency. Systems Hardware revenue decreased
23.0percent as reported and 17percent adjusted for the divested
Systemx business (5points) and currency (1point). Performance
reflected the impact of the zSystems product cycle as well as
declines in Power Systems and Storage. In 2014, the company took
significant actions to reposition the Systems Hardware business
for higher value, and reinforced its commitment to driving innova-
tion in high-end systems and storage.
Revenue from the major markets declined 4.3percent as
reported and 1percent adjusted for the divestitures (2points) and
currency (1point). Growth markets revenue decreased 9.9percent
as reported and 3percent adjusted for the divestitures (3points)
and currency (4points) compared to 2013.
The consolidated gross profit margin of 50.0percent improved
0.5points year to year. The operating (non-GAAP) gross margin
of 50.6percent increased 0.1points compared to 2013 primarily
driven by an improved mix toward Software.