IBM 2015 Annual Report Download - page 62

60 Management Discussion
International Business Machines Corporation and Subsidiary Companies
OTHER INFORMATION
Looking Forward
The company’s strategies, investments and actions are all taken
with an objective of optimizing long-term performance. A long-term
perspective ensures that the company is well-positioned to take
advantage of major shifts occurring in technology, business and
the global economy.
Within the IT industry, there are major shifts occurring—driven
by data and analytics, cloud and changes in the ways individuals
and enterprises are engaging. In 2015, the company had continued
strong performance in its strategic imperatives that are focused on
these market shifts. The company’s cloud, analytics, mobile, social
and security solutions together generated $29billion in revenue,
which is approximately 35percent of total consolidated revenue.
Revenue from the strategic imperatives increased 17percent
compared to 2014, or 26percent excluding the impacts of cur-
rency and the divested System x and customer care businesses.
In 2015, the company continued to take significant actions to drive
the shift towards its strategic imperatives with targeted invest-
ments, as well as moving away from areas that do not support the
strategic profile.
The company’s strategic direction is clear and compelling, and
the company continues its shift to the higher value areas of enter-
prise IT. The strong revenue growth in the strategic imperatives
confirms that, as does the overall profitability of the business. The
company expects revenue from its strategic imperatives to con-
tinue to deliver strong growth. These offerings are as high value
as other parts of the business, which continue to manage clients’
most critical business processes. As investments in the strategic
imperatives begin to reach scale, the company expects modest
margin improvement. In addition, the company expects to continue
to allocate its capital efficiently and effectively to investments, and
to return value to its shareholders through a combination of divi-
dends and share repurchases. Over the longer term, in considering
the opportunities it will continue to develop, the company expects
to have the ability to generate low single-digit revenue growth,
and with a higher value business mix, high single-digit operating
(non-GAAP) earnings per share growth, with free cash flow reali-
zation in the 90’s percent range.
In the near term, there are a few dynamics that are inconsistent
with that longer term trajectory. Specifically, in 2016, the company
will be continuing to manage and drive the ongoing transformation
in the business. As an example, GBS continues its transition, with
strong growth in strategic imperatives offset by declines in the
more traditional areas. The company will continue to engineer this
shift. The company expects a continued impact to its software
transaction revenue growth, as many of its largest customers con-
tinue to utilize the flexibility that the company has provided, as they
commit to the company’s platform for the longer term. In addition,
while the company is fully participating in the shift to cloud, the
margins in that business are impacted by the level of investment
the company is making, and the fact that the business is not yet
at scale.
The company also expects a continued significant impact
from currency in 2016. At mid-January 2016 spot rates, the impact
to revenue growth is expected to be 2 to 3 points for the year, but,
as with all companies with a similar global business profile, with the
dollar strengthening, the company also expects that currency will
have a significant impact on its profit growth. The profit impact will
be more significant than in 2015 because of translation impact and
the year-to-year impact from prior year cash flow hedging gains.
At mid-January 2016 spot rates, the company expects currency
to impact pre-tax profit growth by approximately $1.3billion, or at
least a dollar of earnings per share.
Overall, looking forward to 2016, the company expects to con-
tinue to grow in many areas of the business, including continued
strong growth in the strategic imperatives. The company expects
a modest expansion in gross margin, and to continue to invest at
a high level, shifting to areas that have the best opportunity. As
is typical, the company also expects over the course of 2016 to
acquire key capabilities, rebalance its workforce, resolve various
matters including tax, and return value to shareholders. This is
all taken into account in the full-year view. Overall, the company
expects GAAP earnings per share from continuing operations for
2016 to be at least $12.45. Excluding acquisition-related charges
of $0.66 per share and non-operating retirement-related items
of $0.39 per share, operating (non-GAAP) earnings per share is
expected to be at least $13.50. For the first quarter of 2016, the
company expects operating (non-GAAP) earnings per share to be
approximately 15percent of the full-year expectation.
From a segment perspective, in 2015, mainframe revenues
increased as a result of the release of the z13, and Power improved
as it was repositioned to address broader opportunities in the
Linux environment. The company is expecting mainframe reve-
nues to decline in 2016 as it enters the back half of the product
cycle. Mainframe margins are expected to improve in the latter half
of 2016 in line with that cycle. Services backlog improved in 2015
to $121billion with increased signings in the year, specifically in the
strategic imperatives. Both GTS and GBS increased signings for
the full year at constant currency and the company expects to con-
tinue to move clients into hybrid environments. There is continued
ability to expand margins in the globalization of service delivery.
The software annuity base, representing approximately 70per-
cent of software revenue, continued to grow. Software renewal
rates remain high and growth from Software-as-a-Service offer-
ings is expected. Transactional mix will not be as impactful in the