International Business Machines Corporation (IBM)

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International Business Machines Corp. (IBM)

Q3 2010 Earnings Call

October 18, 2010 04:30 pm ET

Executives

Patricia Murphy - VP of IR

Mark Loughridge - SVP and CFO

Analysts

Toni Sacconaghi - Sanford Bernstein

Ben Reitzes - Barclays Capital

Kathryn Huberty - Morgan Stanley

Chris Whitmore - Deutsche Bank

David Grossman - Stifel Nicolaus

Mark Moskowitz - JP Morgan

Louis Miscioscia - Collins Stewart

Jason Maynard - Wells Fargo

Keith Bachman - Bank of Montreal

Presentation

Operator

Welcome, and thank you for standing by. At this time, all participants are in a listen-only mode. Today’s conference is being recorded. If you have any objections, you may disconnect at this time. Now I will turn the meeting over to Ms. Patricia Murphy, Vice President of Investor Relations. Ma’am, you may begin.

Patricia Murphy

Thank you. This is Patricia Murphy, Vice President of Investor Relations for IBM. I’m here with Mark Loughridge, IBM’s Senior Vice President and Chief Financial Officer, Finance and Enterprise Transformation. Thank you for joining our third 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 Relation’s 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 the 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 website or from us in Investor Relations.

Now, I’ll turn the call over to Mark Loughridge.

Mark Loughridge

Thank you for joining us today. This quarter we improved our revenue growth rate, expanded gross, pre-tax and net margins and delivered earnings per share of $2.82 up 18% year-to-year and this EPS growth was on top of a very strong performance in the third quarter of 2009 which was also up 18%. We achieved all of this while investing to drive future growth and delivering strong shareholder returns. Revenue growth of 4% at constant currency was up two points from our second quarter growth rate, continuing the trend of improving business performance.

Growth markets had a great quarter, up 13% at constant currency. We've been investing to expand in the new regions and build out IT infrastructure in support of the economic growth. Since the technology had its best revenue growth in six years up 10% and profit was up 46%, capitalizing on new product introductions and continued strong growth in

System x, midrange Power, and storage. We had good growth in Global Business Services. Revenue was up 5% year-to-year. Our transactional signings returned to growth and we’ve been investing in resources in key opportunity areas like business analytics. Across IBM, which includes services and software, business analytics revenue was up 14% year-to-year.

Overall, we delivered $24.3 billion of revenue; that’s up 3% as reported and 4% at constant currency. And once again we had good profit and margin performance. We expanded gross margins by 20 basis points, driven by better margins in Software and Systems and Technology. Our expense was up 1% year-to-year. Underneath this, our operational expense performance was better by a point. We increased pre-tax income by 7%, and pre-tax margin was up 70 basis points to 19.3%. Our third quarter tax rate reflects an updated view of the full year rate to 25%. Our net income was up 12%, and margin expanded over a point to 14.8%. Finally, our ongoing share repurchase activity drove a reduction in our share count of 5%.

All of this contributed to earnings per share of $2.82, up 18% from a year ago. We’ve now had 31 consecutive quarters of EPS growth.

Based on this performance, and our view of the fourth quarter, we are increasing our expectation for the full year of 2010 to at least $11.40 of earnings per share. That’s up $0.15 from our previous view of at least $11.25 in July and represents a 14% year-to-year increase over 2009.

Now I’ll turn to the revenue details starting with a geographic view where I’ll focus my comments on constant currency.

We again had an improving trend in year-to-year revenue growth rate from the second to the third quarter across our geographies, with the Americas better by a point, Europe by two points and Asia Pacific by four points.

In the major markets, we significantly improved the year-to-year growth rate in Canada, France, Germany and Italy and continued our strong performance in the U.K. So we’re encouraged by what we’re seeing in several of the major market countries. The U.S. growth was consistent with second quarter levels and Japan posted very modest growth for the first time in 12 quarters.

As I mentioned in the opening, our growth markets had terrific performance, up 13%, which outpaced the majors by 12 points. The combined revenue in the BRIC countries was up 26%, with strong growth in each of the four countries. Brazil was up 15%, Russia 56%, India up 15%, and China, up 36%.

A few years ago we established a play to capture the opportunity in the growth markets and our investments are really paying off. We have three growth strategies that were aimed at creating new markets. Now you may recall that Bruno Di Leo, our General Manager of the Growth Markets discussed these at our Investor Briefing in May, and I want to spend a minute describing our results this quarter in the context of these strategies.

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