International Business Machines Corporation (IBM)

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International Business Machines (IBM)

Q4 2011 Earnings Call

January 19, 2012 4:30 pm ET


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

Patricia Murphy -


Richard Gardner - Citigroup Inc, Research Division

Keith F. Bachman - BMO Capital Markets U.S.

Benjamin A. Reitzes - Barclays Capital, Research Division

Mark A Moskowitz - JP Morgan Chase & Co, Research Division

Katy Huberty - Morgan Stanley, Research Division

A.M. Sacconaghi - Sanford C. Bernstein & Co., LLC., Research Division

Brad A. Zelnick - Macquarie Research

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

Robert Cihra - Evercore Partners Inc., Research Division

Bill C. Shope - Goldman Sachs Group Inc., Research Division



Welcome, and thank you for standing by. [Operator Instructions] 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 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 the related GAAP measures in accordance with SEC rules. You'll 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. In the fourth quarter, we grew revenue, expanded growth, pretax and net margins and delivered operating earnings per share of $4.71, up 11% year-to-year. For the full year, we delivered revenue of almost $107 billion, which was up 7%, operating pretax income of $21.6 billion, up 9%, and operating EPS of $13.44, up 15%. Our 2011 results put us well on track to our 2015 roadmap objective.

Looking at the fourth quarter by segment, we continued to build our momentum in software, our performance reflecting both strong demand for our offerings and leadership sales execution. Our software revenue was up 9%, driven by aggressive growth in our focus areas like Smarter Commerce, business analytics and storage solutions. Our software profit was up 12%.

Our Services business delivered powerful margin and profit growth, with combined pretax income of 17%. Services revenue growth was again led by growth markets, which were up 13% at constant currency. Our total services backlog ended the year at $141 billion. At constant currency, that's flat year-to-year and up $5 billion since September. Within Hardware, Power Systems was up 6% as we continue to drive competitive displacements. We've now had 15 consecutive quarters of share gain in UNIX. In fact, with the exception of mainframe, which was coming off of the biggest quarter in its history last year, each of our 16 brands across the company gained or held share.

Turning to profit, our ongoing focus and productivity, together with the relative strength of our software business, drove strong margin performance. Our operating gross margin was up 1.1 points to over 50%. We expanded operating pretax margins almost a full point and grew pretax income 6%. And while our tax rate was up year-to-year, we still expanded net margin above our model rate.

When you put this all together, we delivered operating EPS of $4.71, which was up 11% and $13.44 for the year, up 15%, making this our ninth consecutive year of double-digit EPS growth.

Our strong earnings performance drove $9 billion of free cash flow in the quarter and $16.6 billion for the year. With that cash, we continue to invest in capital and acquisitions and we delivered significant returns to shareholders with over $18 billion in share repurchase and dividends this year.

Looking forward, we're confident in our ability to continue to leverage our business model to expand margin, grow profit, generate cash and return value to shareholders. And in 2012, we expect to deliver at least $14.85 of operating earnings per share for the year.

For the fourth quarter, revenue at constant currency was in line with our expectations. While currency provided a benefit to revenue growth of about 25 basis points in the quarter, currency movement, since we announced our third quarter earnings in October, impacted our revenue by about a point of growth or $300 million.

Looking at the geographies on a constant currency basis, revenue in our major market countries was essentially flat year-to-year. In the Americas, Canada had terrific performance, up 13%. The U.S. grew 1% off of last year's very strong growth of 10%. In Europe, our growth rate improved compared to the third quarter. Germany returned to growth, up 4%, and once again, we had good growth in the U.K. and Spain, which were each up 9%. We've now had 9 consecutive quarters of constant currency revenue growth in the U.K. and Spain has now grown 5 consecutive quarters, leveraging its global relationships.

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