International Business Machines Corporation (IBM)

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International Business Machines (IBM)

Q4 2010 Earnings Call

January 18, 2011 4:30 pm ET

Executives

Mark Loughridge - Chief Financial Officer and Senior Vice President of Finance & Enterprise Transformation

Patricia Murphy - IR

Analysts

Louis Miscioscia - Collins Stewart LLC

Joseph Foresi - Janney Montgomery Scott LLC

Benjamin Reitzes - Barclays Capital

Robert Cihra - Caris & Company

Moshe Katri - Cowen and Company, LLC

John Slack

Kathryn Huberty - Morgan Stanley

Toni Sacconaghi - Bernstein Research

David Grossman - Stifel, Nicolaus & Co., Inc.

Jason Maynard - Wells Fargo Securities, LLC

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. 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 CFO, Finance and Enterprise Transformation. 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 the 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

Thanks for joining us today. We just completed a great quarter, with 7% revenue growth, both as reported and at constant currency, expansion of gross pre-tax and net margins and earnings per share of $4.18, up 16% year-to-year. This represents our 32nd consecutive quarter of earnings per share growth, the only Dow component with that record. And we generated $8.7 billion of free cash flow in the quarter, up $1.5 billion year-to-year.

Our revenue growth of 7% was the best constant-currency revenue growth in almost a decade, driven by Hardware and Software. Systems and Technology was up 22% at constant currency, with growth in every platform and particularly strong performance in our System z mainframe. Our Softer revenue was up 12% at constant currency without the divested PLM operations. And as I said back in October, our total services revenue growth rate was in line with the third quarter.

Our total services backlog ended the year at $142 billion. At constant currency, that's up $4 billion year-to-year and up $7 billion since September.

From a geographic perspective, our major market revenue growth was 5% at constant currency, led by the U.S., France and Italy. Our growth markets revenue was up 13% at constant currency. Business Analytics, one of our key growth initiatives, was up 19%.

Along with strong revenue growth, we had great profit and margin performance while continuing a high level of investment. You see this in our financial summary. We expanded gross margin by 8/10, with increases in Systems and Technology and Software.

Our expense was up 7% year-to-year, in line with the revenue growth. The increase was driven by acquisitions over the last 12 months and higher expenses associated with our strong revenue performance, as well as investments in capacity for ongoing growth.

We increased pre-tax income by 9%, and pre-tax margin was up over 50 basis points to 24%. Our net income was also up 9%, and net margin expanded to over 18%. Finally, our ongoing share repurchase activity drove a 6% reduction in our share count.

When you put this all together, we delivered EPS of $4.18, which is up 16% year-to-year. For the full year, our EPS was $11.52, up 15%, making this our eighth consecutive year of double-digit EPS growth.

Our strong earnings performance drove $16 billion of free cash flow, up $1.2 billion year-to-year. And consequently, we're ending the year with a very strong balance sheet, including $11.7 billion of cash, most of which is in the U.S.

I want to put this performance in the context of our 2008 roadmap. I'll then take you through the details of our fourth quarter results and wrap up with our 2015 roadmap.

Early in 2007, we established our earnings per share roadmap to 2010. This is a chart I showed at our Investor Meeting in May of the 2007, when we introduced the roadmap. In that meeting, we presented an EPS objective of $10 to $11.

In addition to the EPS target, we provided an analysis of the key factors driving earnings growth from 2006 to 2010. Now at the end of the roadmap period, we've delivered $11.52 of earnings per share, well above the high end of the range of $10 to $11.

Let me go through the major elements. With the pressure on revenue given the recession, we relied on other elements of our model to achieve the 2010 objective. We worked on our cost and expense structure, continuing to globalize our business. We continued to improve our mix of business, and we generated a lot of cash, which allowed us to acquire key capabilities and to return significant value to shareholders.

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