International Business Machines Corporation (IBM)

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International Business Machines Corp. (IBM)

Q1 2010 Earnings Call

April 19, 2010 4:30 pm ET

Executives

Patricia Murphy - Vice President of Investor Relations

Mark Loughridge - Chief Financial Officer, Senior Vice President

Analysts

Toni Sacconaghi - Sanford C. Bernstein

Ben Reitzes - Barclays Capital

Katie Huberty – Morgan Stanley

David Grossman - Thomas Weisel Partners

Richard Gardner - Citigroup

Mark Moskowitz – JP Morgan

Keith Bachman – BMO Capital Markets

Bill Shope – Credit Suisse

David Bailey - Goldman Sachs

Chris Whitmore - Deutsche Bank

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 first 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. This quarter we delivered $1.97 of earnings per share which was up 16% year-over-year. Our improving business mix and focus on driving productivity again delivered solid margin and profit performance.

We increased pre-tax margin by a point and both pre-tax and net income were up 13%. We had great cash performance, increasing free cash flow by $400 million to $1.4 billion. We returned another $4.7 billion to shareholders with $700 million in dividends and $4 billion of share repurchases. The balance sheet is solid and capital structure is well positioned to support our full-year objectives. Our liquidity position remains strong as we finished the quarter with $14 billion of cash on hand. This was a very good start to the year.

Our key investments are unique to the IBM strategy and are paying off. This quarter our growth markets were up 8% year-over-year at constant currency led by the BRIC countries which were up 14% as these countries build out and integrate their public and private infrastructures.

Business analytics is one of the fundamental drivers of our software performance. Software revenue was up 11%, or 5% at constant currency, with share gains in each of the five middleware brands. Across software and services our business analytics revenue was up double-digits. In Services an increasing portion of our consulting business is driven by our Smarter Planet engagements and business analytics. This quarter consulting signings were up 18% or 12% at constant currency with the strongest consulting performance in over three years. So our growth initiatives helped drive our first quarter revenue performance.

You may recall that in January we expected to improve our revenue growth rate from the fourth quarter to the first resulting in mid-single digit revenue growth at actual rates. Let me tell you how we did and give you a few highlights. Our first quarter revenue was up 5% year-over-year, though it was driven more by our business operations and less by currency. With a strengthening dollar, currency was less of a help, only contributing 5 points of growth versus the 6 to 7 points based on mid-January spot rates. This impacted revenue by about $250 million so our underlying business performance was better than expected.

The improvement in revenue growth from our fourth quarter was broad based with improvements across each of our major segments and geographies. In our segment performance, systems and technology improved 11 points, software 9 points, global business services 4 points and global technology services 3 points; all at constant currency. By geography, America’s revenue growth improved 6 points, EMEA 5 points and Asia 4 points. The major markets rate improved 5 points and the growth markets 6 points, led by the BRICs.

Keep in mind our solid annuity base, so our transactional growth rates drove these gains and so now, after a very good first quarter, we are increasing our earnings per share expectations for the year to at least $11.20 which is up $0.20 from our previous view of at least $11.

Now I will turn to the detailed financial results for the first quarter. As I just mentioned, our revenue was up 5% year-over-year to $22.9 billion. Gross margin expanded 20 basis points due to better margins in Services and Software and more favorable business mix. Our expense was up 2% year-over-year. Within this, our operational performance was better 5 points but was more than offset by a 7 point impact from currency and a point of acquisition expense. Pre-tax margin was up a point year-over-year to 15.4% and net income margin expanded nearly a point to 11.4%. With continued margin expansion we increased both pre-tax and net income by 13% year-over-year. Finally, our ongoing share repurchase activity drove a 2% reduction in our share count. So bottom line, we delivered $1.97 of earnings per share, up 16% from a year ago.

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