International Business Machines Corp. Q2 2010 Earnings Call Transcript

International Business Machines Corp. Q2 2010 Earnings Call Transcript
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International Business Machines Corp (IBM)

Q2 2010 Earnings Call

July 19, 2010 4:30 p.m. ET


Patricia Murphy – Vice President of Investor Relations

Mark Loughridge – Chief Financial Officer, Senior Vice President


Toni Sacconaghi – Sanford C. Bernstein

Ben Reitzes – Barclays Capital

Robert Cihra – Caris & Company

Katie Huberty – Morgan Stanley

David Grossman – Thomas Weisel Partners

Richard Gardner – Citigroup

Mark Moskowitz – JP Morgan

Keith Bachman – BMO Capital Markets

Chris Whitmore – Deutsche Bank

Maynard Um – UBS



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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. 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 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 8K 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.

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

Mark Loughridge

Thank you for joining us today. This quarter we continued the trend of improving business performance; increasing constant currency revenue growth, expanding margin, and once again, delivering double-digit earnings per share growth.

We’ve now grown EPS in each of the last 30 quarters. And since the beginning of our 2010 roadmap, we’ve grown EPS at a double-digit rate in 12 of the last 14 quarters.

Our revenue growth of 2% was two points better than our constant currency performance in the first quarter, and seven points better than our fourth quarter growth rate.

Our revenue growth would have been about a point higher, adjusting for the divested PLM business. So on this basis, the improvement was broad based across all segments and all geographies, including Europe.

Our performance is driven by the investments we’ve been making to capture growth opportunities and to deliver value to our clients. We’ve been investing heavily to build out the infrastructures in the emerging countries.

This quarter, our growth markets were up 14%, or 9% of constant currency; led by the BRIC countries which were up 16% of constant currency. Our performance in the growth markets has consistently outpaced the major markets.

And as a result, for the first half of this year, our business in the growth markets is now as large as our Euro-Zone business for the first time.

We’ve been investing to extend our technology leadership. Earlier this year we introduced Power7 technology to our Midrange unit servers. And this quarter, the Midrange grew 11%, which resulted in four-points-a-share gain in Power Systems.

In the third quarter, we’ll have Power7 across our entire UNIX product line. And we’ll introduce and ship our next generation mainframe solution. We have been investing in key growth areas such as Business Analytics. Our Business Analytics revenue was up 14%, which contributed to the strong performance of both Software and Global Business services.

Global Business Services revenue growth improved to 3%, and Software Key-Branded Middleware was up 10% at constant currency. And we took share again, this quarter in Software.

We’ve been investing in acquisitions to build our skills and technology in support of our growth initiatives. In the first half, we have closed six acquisitions and announced another three, for a total of about $3 billion.

These acquisitions add to our capabilities in areas such as Industry Solutions for Smarter Planet Initiatives, and Business Analytics and Cloud Computing.

In this quarter, we also continued to improve our profit profile, expanding pre-tax margin by a point, and growing earnings per share by 13% to $2.61.

And remember, we’ve delivered this profit performance compared to a strong second quarter of 2009, where we expanded pre-tax margin by over four points, and grew EPS by 18 percent.

So now based on our first-half performance and our view of the second half, we’re increasing our expectations for the full year of 2010 to at least $11.25 of earnings per share. That’s up from our view in April, and up $0.25 from January.

Now, let’s turn to the financial results for the quarter with a quick walk down the P&L.

We delivered $23.7 billion of revenue. That’s up 2% as reported in a constant currency. We completed the sale of the Software PLM operations at the end of the first quarter. This divestiture impacted IBM’s revenue growth by about a point, and our Software growth by about four points.

This quarter we dealt with a sharp strengthening of the Dollar versus the Euro. Currency provided 40 basis points of revenue growth as compared to the 200-to-300 basis points projected based on mid-April spot rates. So that’s a two-to-three point impact to our revenue growth.

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