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55
Management Discussion
International Business Machines Corporation and Subsidiary Companies
Systems Hardware
($ inmillions)
For the year ended December 31: 2014 2013
Yr.-to-Yr.
Percent
Change
Yr.-to-Yr.
Percent Change
Adjusted for
Currency
Systems Hardware external revenue $9,996 $12,988 (23.0)% (16.8)%*
zSystems (23.3)% (22.6)%
Power Systems (18.9) (18.2)
Storage (12.0) (11.0)
Systemx (35.1) (34.9)
* Adjusted for divestitures and currency.
Systems Hardware revenue of $9,996 million decreased 23.0
percent as reported in 2014, 17percent adjusted for the divesti-
ture of the Systemx business (5points) and currency (1point). In
2013, the Systems Hardware business reported a profit decline
of $1,653 million compared to 2012. During 2014, the company
worked to reposition this business and to stabilize profit. It divested
the Systemx business and announced the divestiture of the
Microelectronics business. Performance in 2014 reflected year-
to-year declines related to the zSystems product cycle as well
as declines in Power Systems and Storage. Systems Hardware
grew profit in the fourth quarter, and was profitable for the year.
Profit performance year to year was impacted by the divestiture
and currency, in addition to the revenue impacts.
The fourth quarter of 2014 marked the 10th quarter of the
current zSystems product cycle. In January 2015, the company
announced the z13, the new generation mainframe. The z13
system culminates a $1billion investment and five years of devel-
opment, leverages the innovation of more than 500 new patents
and represents a collaboration with more than 60clients. The
result of this effort is a mainframe that has the world’s fastest pro-
cessor that can execute two-and-a-half billion transactions a day.
Although Power Systems revenue was down year to year, there
was sequential improvement in the year-to-year revenue growth
rate at constant currency in the last two quarters of 2014. The com-
pany has repositioned Power which is not only a systems business,
but also an open chip processor and an IP income opportunity
through the OpenPOWER foundation. In June 2014, scale-out
systems based on POWER8 were introduced and high-end POW-
ER8-based enterprise systems were announced in October 2014.
These systems are highly scalable and can handle the most data
intensive, mission critical applications in the industry. In addition,
the company saw continued expansion of the OpenPOWER con-
sortium, with over 80 members, 14 of which are in greater China.
Since the establishment of the consortium in 2013, several offer-
ings have been introduced by consortium members based on
the POWER architecture. In addition, the company has initiated
a strategic partnership with Suzhou PowerCore, which intends to
use POWER architecture to develop and market processors for
servers in China.
Storage revenue decreased year to year in 2014. However,
at constant currency, it delivered sequential improvement in the
year-to-year growth rate over the last three quarters of 2014. Full-
year performance included strong contribution from FlashSystem
and the Storwize portfolio. However, this was more than offset by
weakness in high-end disk and the continued wind down of the
legacy storage-related OEM business.
($ inmillions)
For the year ended December 31: 2014 2013
Yr.-to-Yr.
Percent/
Margin
Change
Systems Hardware
External gross profi t $3,945 $5,299 (25.6)%
External gross profi t margin 39.5% 40.8% (1.3) pts.
Pre-tax income $ 34 $ 213 (84.1)%
Pre-tax margin 0.3% 1.6% (1.3) pts.
Systems Hardware gross profit margin of 39.5percent decreased
1.3points year to year. The decrease was driven by lower margins
in Power Systems (1.3points) and Storage (0.9points), partially
offset by an increase due to mix (0.7points), driven by the divesti-
ture of the Systemx business.
In 2014, the company took significant actions to reposition its
Systems Hardware business for higher value, and reinforced its
commitment to driving innovation in high-end systems and storage.
It repositioned Power through the development of the POWER8
systems which are built for cloud and big data, and it made
available the POWER8 architecture through the OpenPOWER
consortium to build an open ecosystem and an IP opportunity.
further enable its analytics portfolio in a cloud environment and
announced IBM Verse, a cloud-based email and collaboration
offering that integrates Watson capabilities. This type of continued
innovation in offerings, together with expanding services on the
Bluemix Platform-as-a-Service, will better allow customers to
move to a hybrid environment.