International Business Machines Corporation (IBM)

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International Business Machines (IBM)

Q2 2011 Earnings Call

July 18, 2011 4:30 pm ET

Executives

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

Patricia Murphy - IR

Analysts

Benjamin Reitzes - Barclays Capital

Robert Cihra - Caris & Company

Richard Gardner - Citigroup Inc

Chris Whitmore - Deutsche Bank AG

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

Mark Moskowitz - JP Morgan Chase & Co

Scott Craig

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

Katy Huberty - Morgan Stanley

Bill Shope - Goldman Sachs Group Inc.

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 Chief Financial Officer, Finance and Enterprise Transformation. Thank you for joining our second 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 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 second quarter, we delivered revenue growth of 12%, and operating earnings per share of $3.09, up 18% year-to-year.

With this performance, we're increasing our full year 2011 expectation for operating earnings per share to at least $13.25, which is up $0.10 from our previous view of at least $13.15, and up $0.25 from the beginning of the year. The 12% revenue growth was driven by our transactional businesses in hardware and software. Software growth was driven by key branded middleware, which was up 21%. Our systems revenue was up 20%, with strong performance in System z, POWER and System x servers.

In services, our total backlog increased to $144 billion. That's up almost $15 billion from last year with $13 billion from currency and $2 billion of constant currency performance. Services revenue was up 10%. Within this, growth markets were up 22% or 10% at constant currency.

Overall, growth markets performance was strong, and revenue from these countries was up 13% at constant currency, our fourth consecutive quarter of double-digit constant currency performance. In fact, we had continued momentum in all of our growth initiatives, growth markets, business analytics, cloud and Smarter Planet.

Turning to profit. We increased operating pretax income by 10%, and operating net income 11%. Bottom line, we delivered operating EPS of $3.09, which was up 18% year-to-year.

Our strong earnings performance resulted in $3.4 billion of free cash flow in the quarter, and in the last 12 months we've generated $16 billion of free cash flow. With this strong cash performance, we've delivered significant returns to shareholders, with almost $5 billion in share repurchase and dividends this quarter and almost $19 billion over the last year.

Now I'll get into the second quarter details, starting with revenue by geography. Our geographic performance was very consistent with the first quarter, with growth markets and North America, once again, providing the biggest lift. I'll discuss the geographic results on a local currency basis.

Major markets revenue was up 3%. The U.S., our largest market, was up 6%, and Canada was up 11%, driven by momentum in our server and software businesses. In Europe, we had a modest improvement in the year-to-year growth rate, with continued growth in U.K., France and Spain. And this quarter, Germany and Italy returned to growth. Rounding out the G7, in Japan our revenue was down 5%, consistent with the first quarter growth rate.

Our growth markets continued their very strong performance, outpacing the majors by 10 points. Since we announced our growth markets unit in the beginning of 2008, the revenue growth rate has outpaced the major markets by an average of 9 points, again on a local currency basis. With 13% revenue growth, this is the fourth consecutive quarter of double-digit revenue growth and share gains. We also had double-digit growth and share gains in each of the BRIC countries. The combined revenue in the BRICs was up 21%. But our success goes beyond the BRICs, we had double-digit growth in almost 40 growth market countries.

Our growth is broad-based from a segment perspective, as well. This quarter, we had 24% growth in hardware, with great performance in all system brands. These are high value offerings, not low end content. For example, we have 24 new mainframe customers in growth market countries just since the introduction of the zEnterprise last year. Think of it as planting the flag, which provides a great base for future growth.

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