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 are comprised of 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 “Segment Details.”
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 shared expense includes 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 consistent with the company’s management and measurement 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 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 | Software | Systems and Technology | Global Financing | Total Segments |
| 2008: | ||||||
| External revenue | $39,264 | $19,628 | $22,089 | $19,287 | $2,559 | $102,827 |
| Internal revenue | 1,546 | 1,044 | 2,761 | 882 | 1,892 | 8,125 |
| Total revenue | $40,810 | $20,671 | $24,850 | $20,169 | $4,451 | $110,951 |
| Pre-tax income | $4,607 | $2,681 | $7,075 | $1,550 | $1,617 | $17,531 |
| Revenue year-to-year change | 8.1% | 7.5% | 10.9% | (9.6)% | 11.7% | 5.0% |
| Pre-tax income year-to-year change | 29.5% | 29.9% | 17.9% | (28.0)% | 16.7% | 15.6% |
| Pre-tax income margin | 11.3% | 13.0% | 28.5% | 7.7% | 36.3% | 15.8% |
| 2007: | ||||||
| External revenue | $36,103 | $18,041 | $19,982 | $21,317 | $2,502 | $97,944 |
| Internal revenue | 1,636 | 1,193 | 2,416 | 998 | 1,482 | 7,726 |
| Total revenue | $37,739 | $19,234 | $22,398 | $22,315 | $3,984 | $105,670 |
| Pre-tax income | $3,557 | $2,064 | $6,002 | $2,153 | $1,386 | $15,163 |
| Revenue year-to-year change | 10.7% | 10.9% | 9.7% | (3.6)% | 2.4% | 6.9% |
| Pre-tax income year-to-year change | 8.2% | 21.0% | 9.3% | 23.8% | (4.7)% | 10.8% |
| Pre-tax income margin | 9.4% | 10.7% | 26.8% | 9.6% | 34.8% | 14.3% |
| 2006: | ||||||
| External revenue | $32,322 | $15,969 | $18,161 | $21,970 | $2,365 | $90,787 |
| Internal revenue | 1,763 | 1,373 | 2,249 | 1,168 | 1,527 | 8,080 |
| Total revenue | $34,086 | $17,341 | $20,409 | $23,138 | $3,892 | $98,867 |
| Pre-tax income | $3,288 | $1,706 | $5,493 | $1,739 | $1,455 | $13,682 |
| Revenue year-to-year change | 1.4% | 0.6% | 8.5% | 4.7% | (0.4)% | 0.3% |
| Pre-tax income year-to-year change | 25.6% | 116.9% | 14.9% | (7.6)% | (8.1)% | 19.1% |
| Pre-tax income margin | 9.6% | 9.8% | 26.9% | 7.5% | 37.4% | 13.8% |
Reconciliations of IBM as Reported
| ($ in millions) | |||
| For the year ended December 31: | 2008 | 2007 | 2006 |
|---|---|---|---|
| Revenue: | |||
| Total reportable segments | $110,951 | $105,670 | $98,867 |
| Other revenue and adjustments | 803 | 842 | 637 |
| Elimination of internal revenue | (8,125) | (7,726) | (8,080) |
| Total IBM consolidated revenue | $103,630 | $98,786 | $91,424 |
| ($ in millions) | |||
| For the year ended December 31: | 2008 | 2007 | 2006 |
|---|---|---|---|
| Pre-Tax Income: | |||
| Total reportable segments | $17,531 | $15,163 | $13,682 |
| Elimination of internal transactions | (433) | (194) | (171) |
| Unallocated corporate amounts | (382) | (480) | (194) |
| Total IBM consolidated pre-tax income from continuing operations | $16,715 | $14,489 | $13,317 |
Within pre-tax income from continuing operations, unallocated corporate amounts in 2008 and 2007 include the interest expense associated with the incremental debt to support the ASR executed in 2007. The gain from the divestiture of the printing business is also included in the unallocated corporate amount for 2007.
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 here, 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 this 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 | Software | Systems and Technology | Global Financing | Total Segments |
| 2008: | ||||||
| Assets | $15,456 | $6,874 | $15,336 | $7,313 | $36,119 | $81,098 |
| Depreciation/amortization of intangibles | 1,797 | 99 | 905 | 851 | 2,065 | 5,718 |
| Capital expenditures/investments in intangibles | 1,607 | 54 | 504 | 754 | 2,143 | 5,062 |
| Interest income | — | — | — | — | 2,604 | 2,604 |
| Interest expense | — | — | — | — | 988 | 988 |
| 2007: | ||||||
| Assets | $16,157 | $7,226 | $10,042 | $7,338 | $37,586 | $78,348 |
| Depreciation/amortization of intangibles | 1,714 | 122 | 684 | 894 | 2,034 | 5,448 |
| Capital expenditures/investments in intangibles | 1,803 | 61 | 559 | 840 | 2,432 | 5,694 |
| Interest income | — | — | — | — | 2,421 | 2,421 |
| Interest expense | — | — | — | — | 966 | 966 |
| 2006: | ||||||
| Assets | $14,483 | $6,517 | $9,262 | $7,437 | $33,945 | $71,643 |
| Depreciation/amortization of intangibles | 1,575 | 136 | 632 | 1,024 | 1,691 | 5,058 |
| Capital expenditures/investments in intangibles | 1,714 | 43 | 423 | 777 | 2,514 | 5,470 |
| Interest income | — | — | — | — | 2,265 | 2,265 |
| Interest expense | — | — | — | — | 792 | 792 |
Reconciliations of IBM as Reported
| ($ in millions) | |||
| At December 31: | 2008 | 2007 | 2006 |
|---|---|---|---|
| Assets: | |||
| Total reportable segments | $81,098 | $78,348 | $71,643 |
| Elimination of internal transactions | (5,594) | (5,964) | (5,347) |
| Unallocated amounts: | |||
| Cash and marketable securities | 11,631 | 16,007 | 10,191 |
| Notes and accounts receivable | 3,632 | 3,639 | 3,743 |
| Deferred tax assets | 8,341 | 2,664 | 5,299 |
| Plant, other property and equipment | 3,172 | 3,098 | 3,091 |
| Pension assets | 1,594 | 17,397 | 10,614 |
| Other | 5,647 | 5,242 | 4,001 |
| Total IBM consolidated | $109,524 | $120,431 | $103,234 |
Major clients
No single client represents 10 percent or more of the company’s total revenue.
Geographic information
The following provides information for those countries that are 10 percent or more of the specific category.
Revenue*
| ($ in millions) | |||
| For the year ended December 31: | 2008 | 2007 | 2006 |
|---|---|---|---|
|
* Revenues are attributed to countries based on location of client. |
|||
| United States | $36,686 | $36,511 | $35,917 |
| Japan | 10,403 | 9,632 | 9,638 |
| Other countries | 56,541 | 52,643 | 45,869 |
| Total | $103,630 | $98,786 | $91,424 |
Net plant, property and equipment
| ($ in millions) | |||
| At December 31: | 2008 | 2007 | 2006 |
|---|---|---|---|
| United States | $6,469 | $6,592 | $6,708 |
| Japan | 1,055 | 890 | 844 |
| Other countries | 4,797 | 5,365 | 4,849 |
| Total | $12,321 | $12,847 | $12,401 |
Revenue by classes of similar products or services
The table below presents external revenue for similar classes of products or services within the company’s reportable segments. Within Global Technology Services and Global Business Services, client solutions often include IBM software and hardware and other suppliers’ products if the client solution requires it. Within Software, product license charges and ongoing subscription and support are reported as Software and consulting, education, training and other product-related services are reported as Services. Within Systems and Technology, Microelectronics original equipment manufacturer (OEM) revenue is primarily from the sale of semiconductors. Microelectronics Services revenue includes circuit and component design services and technology and manufacturing consulting services. See “Description of the Business,” for additional information. The data is presented on a continuing operations basis.
| ($ in millions) | |||
| Consolidated | |||
|---|---|---|---|
| For the year ended December 31: | 2008 | 2007* | 2006* |
|
* Reclassified to conform with 2008 presentation. |
|||
| Global Technology Services: | |||
| Services | $29,928 | $27,482 | $24,570 |
| Maintenance | 7,250 | 6,670 | 5,986 |
| Hardware | 1,648 | 1,496 | 1,511 |
| Software | 438 | 454 | 255 |
| Global Business Services: | |||
| Services | $19,176 | $17,579 | $15,462 |
| Software | 237 | 289 | 348 |
| Hardware | 215 | 173 | 159 |
| Software: | |||
| Software | $20,695 | $18,992 | $17,425 |
| Services | 1,394 | 990 | 735 |
| Systems and Technology: | |||
| Servers | $12,717 | $13,348 | $13,171 |
| Storage | 3,612 | 3,738 | 3,558 |
| Microelectronics OEM | 1,862 | 2,589 | 2,930 |
| Retail Store Solutions | 741 | 872 | 761 |
| Microelectronics Services | 355 | 383 | 499 |
| Printing Systems | — | 386 | 1,050 |
| Global Financing: | |||
| Financing | $1,946 | $1,803 | $1,740 |
| Remarketing | 613 | 699 | 625 |
