International Business Machines Corporation (IBM)

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International Business Machines (IBM)

Q1 2011 Earnings Call

April 19, 2011 4:30 pm ET

Executives

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

Patricia Murphy - IR

Analysts

Keith Bachman - BMO Capital Markets U.S.

Benjamin Reitzes - Barclays Capital

Richard Gardner - Citigroup Inc

Chris Whitmore - Deutsche Bank AG

Toni Sacconaghi - Sanford C. Bernstein & Co., Inc.

Mark Moskowitz - JP Morgan Chase & Co

Scott Craig

Bill Shope - Goldman Sachs Group Inc.

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

Katy Huberty - Morgan Stanley

Presentation

Operator

Welcome, and thank you for standing by. [Operator Instructions] Today's conference is being recorded. [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 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 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

Thanks for joining us today. In the first quarter, we drove 8% revenue growth, expanded gross pretax and net margins and delivered operating earnings per share of $2.41, up 21% year-to-year. With this performance, we're increasing our full year 2011 expectation for operating earnings per share to at least $13.15, which is up $0.15 from our previous view of at least $13. This is a great start on the road to our 2015 objective.

Looking at the drivers of our 8% revenue growth, Systems and Technology was up 19% with double-digit growth in every platform led by our System z mainframe and POWER offerings. Our Software revenue was up 10% without the divested PLM operations or 8% at constant currency. Our Total Services revenue was up 6% with Outsourcing up 7%.

Our Total Services revenue growth rate improved from the fourth quarter. As we’ve discussed the last couple of quarters, the revenue is more influenced by the backlog dynamics than current period transactions, and our total backlog ended the quarter at $142 billion. That's up $8 billion year-to-year or $1.5 billion at constant currency.

From a sector perspective, our 2 largest customer sets, Financial Services and General Business, were each up double digits. Combined, they represent about half our revenue.

Our key growth plays had fantastic performance. We once again had a very strong quarter in the growth markets, up 12% at constant currency with almost 40 countries up double digits.

Business Analytics revenue was up 20% with strong contribution from both Software offerings and our Consulting business. Cloud revenue was up by a factor of 5, and Smarter Planet was up about 20%.

Along with IBM's strong revenue growth, we had great margin performance. We expanded operating gross margin by 80 basis points. The improvement was broad based with particularly strong performance in Systems and Technology. With operating expense growing in line with revenue, we improved operating pretax and net margins by 6/10. This quarter, we really demonstrated the leverage in our model. Bottom line, we delivered operating EPS of $2.41, which was up 21% year-to-year.

Our strong earnings performance generated $800 million of free cash flow in the quarter. And in the last 12 months, we've generated over $15 billion of free cash flow.

In terms of use of capital, we've had a robust program to return value to shareholders. We returned almost $5 billion in share repurchases and dividends this quarter and almost $19 billion over the last year.

Now I'll get into the first quarter details, starting with the revenue by geography. With 5% constant currency revenue growth, we had strong performance in major markets and growth markets. I'll focus the geo comments on constant currency.

Major markets revenue was up 3%. The U.S., our largest market, was up 7%. And Canada was up 9%, leveraging the value of z, POWER and Software offerings.

For the second consecutive quarter, Europe's performance was led by double-digit growth in France. Our growth markets continued very powerful performance, up 12%, outpacing the majors by 9 points. The combined revenue in the BRICs was up 22% with growth in each of the 4 countries and particularly strong growth in China, which was up 33% and Russia, up 53%.

We're continuing expansion into new markets. And this quarter, we had double-digit growth in almost 40 growth market countries.

We're leveraging our high-end systems in our Software portfolio and implementing transformational services projects. So this quarter, we had 19% growth in Hardware with great performance in mainframe and POWER and System x, and we had 16% growth in software.

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