V. Segment information
The company uses business insight and its broad range of IT capabilities to create client- and industry-specific information solutions. The company operates primarily in a single industry using several segments that create value by offering solutions that include, either singularly or in some combination, services, software, hardware and financing.
The company’s major operations comprise a Global Technology Services segment; a Global Business Services segment; a Software segment; a predominantly hardware product segment—Systems and Technology; and a Global Financing segment. The segments represent components of the company for which separate financial information is available that is utilized on a regular basis by the chief executive officer in determining how to allocate the company’s resources and evaluate performance. The segments are determined based on several factors, including client base, homogeneity of products, technology, delivery channels and similar economic characteristics.
Information about each segment’s business and the products and services that generate each segment’s revenue is located in the “Description of Business” section of the Management Discussion, and in “Segment Details.”
In the second quarter of 2005, the company sold its Personal Computing business which was previously a part of the Personal Systems Group. The two remaining units of the Personal Systems Group, Retail Store Solutions and Printing Systems, were combined with the Systems and Technology segment. Personal Computing Division financial results are displayed as part of the segment disclosures for 2005, in a manner consistent with the segment disclosures.
Segment revenue and pre-tax income include transactions between the segments that are intended to reflect an arm’s-length transfer price. Hardware and software that is used by the Global Technology Services segment in outsourcing engagements is primarily sourced internally from the Systems and Technology and Software segments. For the internal use of IT services, Global Technology Services and Global Business Services recover cost, as well as a reasonable fee, reflecting the arm’s-length value of providing the services. The Global Services segments enter into arm’s-length leases and loans at prices equivalent to market rates with the Global Financing segment to facilitate the acquisition of equipment used in services engagements. All internal transaction prices are reviewed annually, and reset if appropriate.
The company utilizes globally integrated support organizations to realize economies of scale and efficient use of resources. As a result, a considerable amount of expense is shared by all of the segments. This expense represents sales coverage, marketing and support functions such as Accounting, Treasury, Procurement, Legal, Human Resources and Billing and Collections. Where practical, shared expenses are allocated based on measurable drivers of expense, e.g., headcount. When a clear and measurable driver cannot be identified, shared expenses are allocated on a financial basis that is consistent with the company’s management system; e.g., advertising is allocated based on the gross profits of the segments. The unallocated corporate amounts arising from certain divestitures, indirect infrastructure reductions, miscellaneous tax items and the unallocated corporate expense pool are recorded in Net income but are not allocated to the segments.
The following tables reflect the results of continuing operations of the segments and the Personal Computing Division consistent with the company’s management system. These results are not necessarily a depiction that is in conformity with GAAP; e.g., employee retirement plan costs are developed using actuarial assumptions on a country-by-country basis and allocated to the segments based on headcount. Different amounts could result if actuarial assumptions that are unique to the segment were used. Performance measurement is based on income before income taxes (pre-tax income). These results are used, in part, by management, both in evaluating the performance of, and in allocating resources to, each of the segments.
Management system segment view
| ($ in millions) | |||||||
| Global Services Segments | |||||||
|---|---|---|---|---|---|---|---|
| For the year ended December 31: | Global Technology Services | Global Business Services | Systems and Technology | Software | Global Financing | Personal Computing Division | Total Segments |
|
NM—Not meaningful |
|||||||
| 2007: | |||||||
| External revenue | $ 36,103 | $ 18,041 | $ 21,317 | $ 19,982 | $ 2,502 | $ — | $ 97,944 |
| Internal revenue | 1,636 | 1,193 | 998 | 2,416 | 1,482 | — | 7,726 |
| Total revenue | $ 37,739 | $ 19,234 | $ 22,315 | $ 22,398 | $ 3,984 | $ — | $ 105,670 |
| Pre-tax income | $ 3,557 | $ 2,064 | $ 2,153 | $ 6,002 | $ 1,386 | $ — | $ 15,163 |
| Revenue year-to-year change | 10.7% | 10.9% | (3.6)% | 9.7% | 2.4% | — | 6.9% |
| Pre-tax income year-to-year change | 8.2% | 21.0% | 23.8% | 9.3% | (4.7)% | — | 10.8% |
| Pre-tax income margin | 9.4% | 10.7% | 9.6% | 26.8% | 34.8% | — | 14.3% |
| 2006: | |||||||
| External revenue | $ 32,322 | $ 15,969 | $ 21,970 | $ 18,161 | $ 2,365 | $ — | $ 90,787 |
| Internal revenue | 1,763 | 1,373 | 1,168 | 2,249 | 1,527 | — | 8,080 |
| Total revenue | $ 34,086 | $ 17,341 | $ 23,138 | $ 20,409 | $ 3,892 | $ — | $ 98,867 |
| Pre-tax income | $ 3,288 | $ 1,706 | $ 1,739 | $ 5,493 | $ 1,455 | $ — | $ 13,682 |
| Revenue year-to-year change | 1.4% | 0.6% | 4.7% | 8.5% | (0.4)% | NM | 0.3% |
| Pre-tax income year-to-year change | 25.6% | 116.9% | (7.6)% | 14.9% | (8.1)% | NM | 19.1% |
| Pre-tax income margin | 9.6% | 9.8% | 7.5% | 26.9% | 37.4% | NM | 13.8% |
| 2005: | |||||||
| External revenue | $ 31,501 | $ 15,906 | $ 20,981 | $ 16,830 | $ 2,401 | $ 2,876 | $ 90,495 |
| Internal revenue | 2,102 | 1,339 | 1,118 | 1,979 | 1,506 | 33 | 8,077 |
| Total revenue | $ 33,603 | $ 17,245 | $ 22,099 | $ 18,809 | $ 3,907 | $ 2,909 | $ 98,572 |
| Pre-tax income/(loss) | $ 2,619 | $ 786 | $ 1,883 | $ 4,779 | $ 1,583 | $ (165) | $ 11,485 |
| Revenue year-to-year change | 3.5% | (1.9)% | 4.9% | 4.8% | 0.3% | NM | (5.0)% |
| Pre-tax income year-to-year change | (10.9)% | (28.9)% | (7.9)% | 19.1% | 8.6% | NM | (0.6)% |
| Pre-tax income margin | 7.8% | 4.6% | 8.5% | 25.4% | 40.5% | NM | 11.7% |
Reconciliations of IBM as Reported
| ($ in millions) | |||
| For the year ended December 31: | 2007 | 2006 | 2005 |
|---|---|---|---|
| Revenue: | |||
| Total reportable segments | $ 105,670 | $ 98,867 | $ 98,572 |
| Other revenue and adjustments | 842 | 637 | 639 |
| Elimination of internal revenue | (7,726) | (8,080) | (8,077) |
| Total IBM consolidated revenue | $ 98,786 | $ 91,424 | $ 91,134 |
| ($ in millions) | |||
| For the year ended December 31: | 2007 | 2006 | 2005 |
|---|---|---|---|
| Pre-Tax Income: | |||
| Total reportable segments | $ 15,163 | $ 13,682 | $ 11,485 |
| Elimination of internal transactions | (194) | (171) | (168) |
| Unallocated corporate amounts | (480) | (194) | 909 |
| Total IBM consolidated pre-tax income from continuing operations | $ 14,489 | $ 13,317 | $ 12,226 |
Within pre-tax income from continuing operations, unallocated corporate amounts in 2007 include the gain from the divestiture of the printing business and the interest expense associated with the incremental debt to support the ASR; 2005 includes the gain from the sale of the Personal Computing business to Lenovo, the impact of the legal settlement with Microsoft Corporation, pension curtailment related charges and unallocated charges related to the restructuring actions.
Immaterial items
Investment in Equity Alliances and Equity Alliances Gains/(Losses)
The investments in equity alliances and the resulting gains and (losses) from these investments that are attributable to the segments did not have a material effect on the financial position or the financial results of the segments.
Segment assets and other items
Global Technology Services assets are primarily accounts receivable, plant, property and equipment including those associated with the segment’s outsourcing business, goodwill, acquired intangible assets, deferred services arrangement transition costs and maintenance parts inventory. Global Business Services assets are primarily goodwill and accounts receivable. Software segment assets are mainly goodwill, intangible assets and accounts receivable. Systems and Technology assets are primarily plant, property and equipment, manufacturing inventory and accounts receivable. The assets of the Global Financing segment are primarily financing receivables and fixed assets under operating leases.
To accomplish the efficient use of the company’s space and equipment, it usually is necessary for several segments to share plant, property and equipment assets. Where assets are shared, landlord ownership of the assets is assigned to one segment and is not allocated to each user segment. This is consistent with the company’s management system and is reflected accordingly in the table below. In those cases, there will not be a precise correlation between segment pre-tax income and segment assets.
Similarly, the depreciation amounts reported by each segment are based on the assigned landlord ownership and may not be consistent with the amounts that are included in the segments’ pre-tax income. The amounts that are included in pre-tax income reflect occupancy charges from the landlord segment and are not specifically identified by the management reporting system. Capital expenditures that are reported by each segment also are consistent with the landlord ownership basis of asset assignment.
The Global Financing segment amounts for Interest income and Interest expense reflect the interest income and interest expense associated with the Global Financing business, including the intercompany financing activities discussed in the “Global Financing” section, as well as the income from investment in cash and marketable securities. The explanation of the difference between Cost of Financing and Interest expense for segment presentation versus presentation in the Consolidated Statement of Earnings is included in the “Global Financing” section of the Management Discussion.
Management system segment view
| ($ in millions) | |||||||
| Global Services Segments | |||||||
|---|---|---|---|---|---|---|---|
| For the year ended December 31: | Global Technology Services | Global Business Services | Systems and Technology | Software | Global Financing | Personal Computing Division | Total Segments |
|
* Reclassified to conform with 2007 presentation. |
|||||||
| 2007: | |||||||
| Assets | $ 16,157 | $ 7,226 | $ 7,338 | $ 10,042 | $ 37,586 | $ — | $ 78,348 |
| Depreciation/amortization of intangibles | 1,714 | 122 | 894 | 684 | 2,034 | — | 5,448 |
| Capital expenditures/investments in intangibles | 1,803 | 61 | 840 | 559 | 2,432 | — | 5,694 |
| Interest income | — | — | — | — | 2,421 | — | 2,421 |
| Interest expense | — | — | — | — | 966 | — | 966 |
| 2006: | |||||||
| Assets | $ 14,483 | $ 6,517 | $ 7,437* | $ 9,262 | $ 33,945 | $ — | $ 71,643* |
| Depreciation/amortization of intangibles | 1,575 | 136 | 1,024 | 632 | 1,691 | — | 5,058 |
| Capital expenditures/investments in intangibles | 1,714 | 43 | 777 | 423 | 2,514 | — | 5,470 |
| Interest income | — | — | — | — | 2,265 | — | 2,265 |
| Interest expense | — | — | — | — | 792 | — | 792 |
| 2005: | |||||||
| Assets | $ 11,809 | $ 6,229 | $ 7,810* | $ 6,485 | $ 31,165 | $ — | $ 63,498* |
| Depreciation/amortization of intangibles | 1,663 | 160 | 1,272 | 672 | 1,923 | 17 | 5,707 |
| Capital expenditures/investments in intangibles | 1,635 | 21 | 642 | 389 | 2,273 | 18 | 4,978 |
| Interest income | — | — | — | — | 2,183 | — | 2,183 |
| Interest expense | — | — | — | — | 617 | — | 617 |
Reconciliations of IBM as Reported
| ($ in millions) | |||
| At December 31: | 2007 | 2006* | 2005* |
|---|---|---|---|
|
* Reclassified to conform with 2007 presentation. |
|||
| Assets: | |||
| Total reportable segments | $ 78,348 | $ 71,643 | $ 63,498 |
| Elimination of internal transactions | (5,964) | (5,347) | (4,503) |
| Unallocated amounts: | |||
| Cash and marketable securities | 16,007 | 10,191 | 12,381 |
| Notes and accounts receivable | 3,639 | 3,743 | 3,282 |
| Deferred tax assets | 2,664 | 5,299 | 3,311 |
| Plant, other property and equipment | 3,098 | 3,091 | 3,069 |
| Pension assets | 17,397 | 10,614 | 20,613 |
| Other | 5,242 | 4,001 | 4,097 |
| Total IBM consolidated | $ 120,431 | $ 103,234 | $ 105,748 |
Revenue by classes of similar products or services
For the Software, Global Business Services, Global Financing and Personal Computing Division segments, the data in the initial exhibit within this note represents the revenue contributions from the products or services that are contained in the segments and that are basically similar in nature. The following table provides external revenue for similar classes of products or services within the Systems and Technology and Global Technology Services segments. Systems and Technology segment’s Technology original equipment manufacturer (OEM) hardware comprises revenue primarily from the sale of semiconductors. Technology Services comprise Systems and Technology’s circuit design business for its OEM clients, as well as the component design services, strategic outsourcing of clients’ design team work and technology and manufacturing consulting services associated with the Engineering and Technology Services Division. Systems and Technology segment’s Storage comprises revenue from disk storage systems and tape subsystems. The following table is presented on a continuing operations basis.
| ($ in millions) | |||
| Consolidated | |||
|---|---|---|---|
| For the year ended December 31: | 2007 | 2006* | 2005* |
|
* Reclassified to conform with 2007 presentation. |
|||
| Global Technology Services: | |||
| Services | $ 29,212 | $ 26,281 | $ 25,633 |
| Maintenance | 6,670 | 5,986 | 5,868 |
| Software | 221 | 56 | — |
| Systems and Technology: | |||
| Servers | $ 13,348 | $ 13,171 | $ 13,009 |
| Storage | 3,738 | 3,558 | 3,345 |
| Technology OEM | 2,589 | 2,930 | 2,391 |
| Retail Store Solutions | 872 | 761 | 627 |
| Technology Services | 383 | 499 | 473 |
| Printing Systems | 386 | 1,050 | 1,136 |
Major clients
No single client represents 10 percent or more of the company’s total revenue.
Geographic information
The following provides information for those countries that are 10 percent or more of the specific category.
Revenue*
| ($ in millions) | |||
| For the year ended December 31: | 2007 | 2006 | 2005 |
|---|---|---|---|
|
* Revenues are attributed to countries based on location of client. |
|||
| United States | $ 36,511 | $ 35,917 | $ 34,951 |
| Japan | 9,632 | 9,638 | 10,753 |
| Other countries | 52,643 | 45,869 | 45,430 |
| Total | $ 98,786 | $ 91,424 | $ 91,134 |
Net Plant, Property and Equipment
| ($ in millions) | |||
| At December 31: | 2007 | 2006 | 2005 |
|---|---|---|---|
| United States | $ 6,592 | $ 6,708 | $ 6,907 |
| Japan | 890 | 844 | 922 |
| Other countries | 5,365 | 4,849 | 4,327 |
| Total | $ 12,847 | $ 12,401 | $ 12,156 |
