International Business Machines Corporation (IBM)

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International Business Machines Corp. (IBM)

Q4 2009 Earnings Call

January 19, 2010 4:30 pm ET

Executives

Patricia Murphy - Vice President of Investor Relations

Mark Loughridge - Chief Financial Officer, Senior Vice President

Analysts

Richard Gardner - Citigroup

Toni Sacconaghi - Sanford C. Bernstein

Ben Reitzes - Barclays Capital

Robert Cihra - Caris & Company

David Bailey - Goldman Sachs

Katie Huberty – Morgan Stanley

Chris Whitmore - Deutsche Bank

Lou Miscioscia – Brigantine Advisors

Scott Craig – Bank of America

David Grossman - Thomas Weisel Partners

Presentation

Operator

Welcome and thank you for standing by. (Operator Instructions) Now I will turn the meeting over to Ms. Patricia Murphy, Vice President of Investor Relations. Madam, you may begin.

Patricia Murphy

Thank you. This is Patricia Murphy, Vice President of Investor Relations for IBM. I am here with Mark Loughridge, IBM’s Senior Vice President and Chief Financial Officer. Thank you for joining our fourth quarter earnings presentation. The prepared remarks will be available in roughly an hour, and a replay of this webcast will be posted to our Investor Relations website by this time tomorrow.

Our presentation includes certain non-GAAP financial measures in an effort to provide additional information to investors. All non-GAAP measures have been reconciled to their related GAAP measures in accordance with SEC rules. You will find reconciliation charts at the end and in the Form 8-K submitted to the SEC.

Let me remind you that certain comments made in this presentation may be characterized as forward looking under the Private Securities Litigation Reform Act of 1995. Those statements involve a number of factors that could cause actual results to differ materially. Additional information concerning these factors is contained in the company’s filings with the SEC. Copies are available from the SEC, from the IBM web site, or from us in Investor Relations.

Now, I will turn the call over to Mark Loughridge.

Mark Loughridge

Thank you for joining us today. The fourth quarter capped off a great year for IBM driven by continued margin expansion, profit growth, and cash generation, all in an uncertain environment.

Let me start out by sharing a few financial highlights. In systems, we had substantial share gains in POWER 4 points, System X 3 points, Blades 6 points and storage 1 point. In software, we had share gains in WebSphere, Tivoli and Key Branded Middleware and in services we booked $18.8 billion of services signings and $57 billion for the year.

In 2009, outsourcing signings were up 9% or 11% at constant currency. Once again we had great profit and margin performance. This quarter, PTI grew 10%. We expanded margin and grew pre-tax profit in every segment.

As we indicated in October, we had double-digit profit growth in Systems and Technology, up 15% for the year. PTI margin was up 2.8 points led by Services up over 2 points, Software up over 5 points and Financing up over 6 points. When you put this all together, we delivered EPS of $3.59, which is up 10% and $10.01 for the year, up 13% making this our seventh consecutive year of double-digit EPS growth.

Now let me give you another perspective on 2009 EPS. In May 2007, we established our roadmap, with an EPS objective for 2010 of $10 to $11. With EPS of $10.01 in 2009, despite a challenging economy, we got there one year early. In 2010, we expect to deliver our eighth consecutive year of double-digit EPS growth, or at least $11 of earnings per share for the year with consistent EPS growth throughout the year.

For the first quarter we expect a 4-5 point improvement in IBM’s year-to-year revenue growth rate from the fourth quarter at both actual rates and constant currency. This would result in mid single digit revenue growth at actual rates with software posting double-digit growth. We are confident in our ability to continue to leverage our business model to expand margin, grow profit, generate cash, return value to shareholders and return to revenue growth in 2010.

Now, before moving on to the details of the quarter I want to take a step back and talk about our performance over the longer term. You can see that we have consistently generated strong profit and cash growth since the last recession in 2002. So let’s look at what we have accomplished recession to recession.

Since 2002 we have added $12 billion to our pre-tax profit base. Our pre-tax margin is up 2.5 times. Our EPS is up four times and cumulatively we have generated about $80 billion of free cash flow. This is the result of a dramatic transformation we started at the beginning of this decade. It is driven by a combination of shifting our business mix, improving operating leverage through productivity and investing to capture growth opportunities.

Let’s take a look at these three initiatives. First, we have been remixing our business to move to the higher value areas. We exited commoditizing businesses while at the same time acquiring 108 companies since 2000 for a total of almost $22 billion. These portfolio actions have contributed to a significant change in our mix of business. In 2000, services segments PTI was $4.5 billion and in 2009 it is over $8 billion.

Our software profit growth is even more impressive. In 2000 software segment PTI was $2.8 billion and in 2009 it is also over $8 billion. That is almost tripled. In 2009, over 90% of our segment profit came from software, services and financing with software and services each contributing 42% of our segment PTI. The unique portfolio of businesses we have built, heavily weighted toward software and services, generates high profitability and we will continue to remix to higher value through organic investments and acquisitions.

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