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Chairman’s letter
 
Our results in 2005 were achieved through the marketplace performance of our major businesses — Systems and Technology, Software, and Services. Let me describe that performance briefly for each.
Systems and technology:
Our company’s technology strength is the result of long-term investments we’ve made over many years, investments that are now bearing fruit. Last year, IBM’s Systems and Technology business extended its industry leadership, enhancing its competitive standing and staking out advantageous positions in growth markets of the future. Since 2000, IBM’s total share of the server market has grown 9.5 points in annual revenue, according to industry analyst IDC.
Our Systems and Technology revenues in 2005 were up 5 percent. In the fourth quarter, shipments of MIPS (millions of instructions per second) for our zSeries mainframes grew 28 percent, year-to-year — our largest quarter of MIPS shipments on record, leading to our highest mainframe revenue since the fourth quarter of 1998. pSeries UNIX servers had a strong year, growing 15 percent, with double-digit growth in all geographies. We believe this was the fourth straight year of improvement in pSeries’ market position. We expect to maintain our leadership in the fast-growing Blade server business, with a 2005 growth rate of 65 percent. In addition, our system storage business was up 15 percent for the year, driven by our mainstay disk and tape products. And our emerging technologies also gained momentum, such as storage virtualization, which added 1,700 clients.
Led by our sweep of the three major gaming platforms, IBM’s microelectronics business achieved 16 percent growth. Revenue from our 300-millimeter wafer products grew strongly in 2005 — including more than 250 percent growth in the fourth quarter. Engineering & Technology Services grew 39 percent for the year. The Cell Broadband Engine, our revolutionary microprocessor developed through a unique technology collaboration with Sony and Toshiba, is bringing the capabilities of supercomputer-level simulation to multiple arenas, including consumer electronics, healthcare and defense. Recently we combined a number of these engineering and technology operations into a new unit, Technology Collaboration Solutions, to bring greater focus and resources to the opportunities we see in collaborative innovation. There is large and growing demand across engineering-intensive industries — from automotive and aerospace to telecommunications and medical equipment — to leverage the technologies and research prowess of partners. This is not outsourced R&D, but true shoulder-to-shoulder collaboration. The ability to extend IBM’s legendary technology strengths to clients to accelerate their own product and service R&D is a powerful proposition that no one in our industry can easily match.
Software:
Software revenues totaled $15.8 billion in 2005, an increase of 4 percent. We believe we improved our competitive position in all five of our key middleware brands. Indeed, 2005 marked a milestone for our software business. As I’ve reported to you for several years, we have been focusing our internal software R&D and acquisition efforts on the high-growth middleware segment of the software opportunity. Last year, for the first time, more than half of our software revenue came from strategic middleware products vs. the slower growth host or legacy platforms.
In software, as in systems, the technology bets we made several years ago are paying off. Companies are seeking to dissolve barriers that impede the flow of information within the enterprise by deploying open, standards-based middleware to integrate their IT systems and to maximize digital assets in all their forms. There is a significant shift underway in the world of software toward what is called service-oriented architecture (SOA), which allows companies to be much more flexible and responsive. As the worldwide leader in middleware, IBM is in a strong position to capitalize on the SOA market, which some analysts expect to more than double, to $143 billion, by 2008.
Our WebSphere middleware family grew 10 percent in 2005, with particular strength in Application Servers and Portals, which grew 15 percent and 12 percent, respectively. Information management software grew 8 percent, fueled by our content management and information integration products — a set of offerings that we are enhancing with a $1 billion investment in a new “information on demand” practice we announced this February, including advanced tools and 10,000 additional practitioners located in centers of excellence around the world. Our Rational software tools grew 4 percent for the year, and Tivoli 11 percent — including 24 percent growth for Tivoli storage software, as clients continued their strong adoption of our virtualization technologies. In addition, our 2005 acquisitions of companies such as Ascential, Bowstreet, SRD and DWL have strengthened our hand in other high-growth areas, including business integration and Web-enabled software.
Global services:
IBM Global Services remains the leading IT services company in the world, with more than twice the revenue of our nearest rival. We are ranked as the number-one service provider in IT outsourcing, Web hosting and consulting & systems integration. Revenues from Global Services in 2005 totaled $47.4 billion, an increase of 2 percent. Our backlog is estimated at $111 billion, the same as a year ago.
We’ve been seeing a transition in services over the past few years, a shift to smaller deals of shorter duration. These are good opportunities — if you can recalibrate your sales model to capture them in addition to the traditional “mega-deals.” And the profitability of these kinds of deals is very attractive, if your global cost structure is competitive. We had to address both our sales model and services cost structure last year, and we did so. We also took other actions to strengthen our services business — shifting thousands of employees into global delivery centers; rebalancing our Integrated Technology Services portfolio; and doubling the resources dedicated to integrated solutions, which we expect will account for 70 percent of the total IT opportunity by 2008. These changes give us a platform for increasing growth in 2006.
I want to call out in particular our continuing progress in the high-growth market we call Business Performance Transformation Services. This is where we apply our technology prowess and economies of scale to running and transforming business processes for our clients — from supply chain, to human resources, to logistics and more. Our BPTS revenue increased 28 percent in 2005, to $4 billion. We have more than tripled our resources focused on BPTS since early 2004. Several of our 16 acquisitions in 2005 were aimed at strengthening our BPTS capabilities in such areas as healthcare, the order-to-cash cycle and “applications on demand” for small and medium businesses. We’re increasing investments in engineering collaboration. And we recently created a new unit to consolidate and accelerate our efforts in business transformation outsourcing, including a promising opportunity to deliver more standardized business processing services, mainly to smaller enterprises.
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Systems and Financing
World leader in server sales. IBM has improved its server market position by 9.5 points since 2000. Blade server revenue grew by 65 percent in 2005. IBM leads in supercomputers, with 219 of the top 500 systems — including number one (BlueGene/L) and five of the top ten.
Software
World leader in middleware and the second-largest software business overall. IBM is the market leader in information management software, all application integration and middleware market position categories; instant messaging software for corporations; portal software; and systems management and systems operations software.
Services
World leader in IT services and consulting. IBM has approximately 198,000 services professionals globally. Offerings include datacenter outsourcing, business transformation services, consulting, systems integration, application management services, infrastructure and system maintenance and Web hosting. IBM Global Services signings grew 9 percent in 2005. |
  Business Revenue Mix
The company’s business mix has shifted away from commoditizing segments, such as PCs, hard disk drives and DRAMs, and toward higher value businesses: transactional, which provide near-term income; and annuity, which provide predictable, long-term income, supplying capital to invest in future growth.
Transaction Revenue Mix
IBM uses the cash from its reliable annuity businesses to fund investment in high-value integrated solutions: offerings that integrate services and technology to solve a business or infrastructure problem. Clients increasingly seek solutions rather than “point-product” purchases of particular technologies and products.
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Profitability
As a result of these shifts, the company has steadily improved its gross profit margins over the past five years. IBM’s margin is the highest it has been since 1996. |
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