IBM Reports 2009 Second-Quarter Results

IBM Reports 2009 Second-Quarter Results

IBM

IBM (NYSE: IBM)

  • Diluted earnings of $2.32 per share, up 18 percent;
  • Raises full-year 2009 EPS expectations to at least $9.70 from $9.20;
  • Free cash flow of $3.4 billion; cash balance of $12.5 billion;

  • Net income of $3.1 billion, up 12 percent; net margin of 13.3 percent, up 3.0 points;
  • Pre-tax income margin of 18.3 percent, up 4.1 points; largest increase in more than 3 years;
  • Gross profit margin of 45.5 percent, up 2.3 points; up 19 of last 20 quarters;
  • Revenue of $23.3 billion, down 13 percent, or 7 percent adjusting for currency;
  • Software pre-tax margin up 8.3 points; income up 24 percent;
  • Full-year 2009 Software pre-tax income expected to grow at double-digit rate and reach $8 billion;
  • Services pre-tax margin up 4.1 points; income up 23 percent;
  • Services signings up 3 percent; strategic outsourcing signings up 38 percent, both adjusting for currency;
  • 17 services deals greater than $100 million;
  • Public sector revenue up 7 percent, adjusting for currency.

IBM (NYSE: IBM) today announced second-quarter 2009 diluted earnings of $2.32 per share compared with diluted earnings of $1.97 per share in the second quarter of 2008, an increase of 18 percent.

The earnings per share results were the highest for any first, second or third quarter in the company’s history, adjusted for stock splits.

Second-quarter net income was $3.1 billion compared with $2.8 billion in the second quarter of 2008, an increase of 12 percent. Total revenues for the second quarter of 2009 of $23.3 billion decreased 13 percent (7 percent, adjusting for currency) from the second quarter of 2008.

'As a result of our strategic transformation, we have a very strong business model that is delivering superior earnings, cash and client value,” said Samuel J. Palmisano, IBM chairman, president and chief executive officer.

'We have continued our strategic investments in Smarter Planet solutions, business analytics and next generation data centers. As a result we are optimistic about how IBM is positioned to make the most of current growth opportunities as well as those that emerge as the economy recovers. We are well ahead of pace for our 2010 roadmap of $10 to $11 per share.'

IBM said it now expects full-year 2009 earnings of at least $9.70 per share compared with its previous expectation of at least $9.20 per share.

The company expects full-year 2009 pre-tax income for its Software segment to grow at a double-digit rate and reach approximately $8 billion.

From a geographic perspective, the Americas’ second-quarter revenues were $9.9 billion, a decrease of 9 percent (7 percent, adjusting for currency) from the 2008 period. Revenues from Europe/Middle East/Africa were $7.9 billion, down 20 percent (7 percent, adjusting for currency). Asia-Pacific revenues decreased 7 percent (5 percent, adjusting for currency) to $4.9 billion. OEM revenues were $537 million, down 24 percent compared with the 2008 second quarter. Revenues from the company’s growth markets organization decreased 11 percent (up 1 percent, adjusting for currency) and represented 18 percent of geographic revenues.

Total Global Services revenues decreased 12 percent (4 percent, adjusting for currency); pre-tax income increased 23 percent. Global Technology Services segment revenues decreased 10 percent (2 percent, adjusting for currency) to $9.1 billion. Global Business Services segment revenues decreased 15 percent (9 percent, adjusting for currency) to $4.3 billion. IBM signed services contracts totaling $14.0 billion, at actual rates, a decrease of 5 percent (up 3 percent, adjusting for currency), including 17 contracts greater than $100 million. Signings in Consulting and Systems Integration and in Integrated Technology Services were $6.0 billion, a decrease of 14 percent (7 percent, adjusting for currency). Total outsourcing signings increased 3 percent (12 percent, adjusting for currency) to $8.0 billion. The estimated services backlog at June 30 was $132 billion at actual rates compared with $126 billion at March 31, 2009.

Revenues from the Software segment were $5.2 billion, a decrease of 7 percent (flat, adjusting for currency) compared with the second quarter of 2008. Revenues from IBM’s key middleware products, which include WebSphere, Information Management, Tivoli, Lotus and Rational products, were $3.0 billion, a decrease of 2 percent (up 5 percent, adjusting for currency) versus the second quarter of 2008. Operating systems revenues of $529 million decreased 11 percent (4 percent, adjusting for currency) compared with the prior-year quarter.

Revenues from the WebSphere family of software products, which facilitate customers’ ability to manage a wide variety of business processes using open standards to interconnect applications, data and operating systems, increased 8 percent year over year. Revenues from Information Management software, which enables clients to leverage information on demand, decreased 4 percent. Revenues from Tivoli software, infrastructure software that enables clients to centrally manage networks including security and storage capability, decreased 2 percent, and revenues from Lotus software, which allows collaborating and messaging by clients in real-time communication and knowledge management, decreased 14 percent. Revenues from Rational software, integrated tools to improve the processes of software development, decreased 2 percent.

Revenues from the Systems and Technology segment totaled $3.9 billion for the quarter, down 26 percent (22 percent, adjusting for currency). Systems revenues decreased 26 percent (22 percent, adjusting for currency). Revenues from the converged System p products decreased 13 percent compared with the 2008 period. Revenues from System z mainframe server products decreased 39 percent compared with the year-ago period. Total delivery of System z computing power, which is measured in MIPS (millions of instructions per second), decreased 20 percent. Revenues from the System x servers decreased 22 percent. Revenues from System Storage decreased 20 percent, and revenues from Retail Store Solutions decreased 41 percent. Revenues from Microelectronics OEM decreased 23 percent.

Global Financing segment revenues decreased 10 percent (4 percent, adjusting for currency) in the second quarter to $568 million.

The company’s total gross profit margin was 45.5 percent in the 2009 second quarter compared with 43.2 percent in the 2008 second-quarter period, led by improving margins in services and software.

Total expense and other income decreased 19 percent to $6.3 billion compared with the prior-year period. SG&A expense decreased 19 percent to $5.1 billion. RD&E expense of $1.4 billion decreased 14 percent compared with the year-ago period. Intellectual property and custom development income increased to $302 million compared with $285 million a year ago. Other (income) and expense was income of $28 million compared with income of $24 million from a year ago. Interest expense decreased to $101 million compared with $145 million in the prior year.

IBM’s tax rate in the second-quarter 2009 was 27.2 percent compared with 27.5 percent in the second quarter of 2008.

The weighted-average number of diluted common shares outstanding in the second-quarter 2009 was 1.34 billion compared with 1.40 billion shares in the same period of 2008. As of June 30, 2009, there were 1.31 billion basic common shares outstanding.

Debt, including Global Financing, totaled $29.4 billion, compared with $33.9 billion at year-end 2008. From a management segment view, Global Financing debt decreased $1.6 billion from year-end 2008 to a total of $22.8 billion at June 30, 2009, resulting in a debt-to-equity ratio of 6.9 to 1. Non-global financing debt totaled $6.6 billion, a decrease of $3.0 billion since year-end 2008, resulting in a debt-to-capitalization ratio of 35.0 percent from 48.7 percent.

IBM ended the second quarter of 2009 with $12.5 billion of cash on hand and generated free cash flow of $3.4 billion, excluding Global Financing receivables. The company returned $2.4 billion to shareholders through $732 million in dividends and $1.7 billion of share repurchases. The balance sheet remains strong, and the company is well positioned to take advantage of opportunities.

Year-To-Date 2009 Results

Net income for the six months ended June 30, 2009 was $5.4 billion compared with $5.1 billion in the year-ago period, an increase of 6 percent. Diluted earnings per share were $4.02 compared with $3.61 per diluted share for the 2008 period, an increase of 11 percent. Revenues for the six-month period totaled $45.0 billion, a decrease of 12 percent (5 percent, adjusting for currency) compared with $51.3 billion for the six months of 2008.

Forward-Looking and Cautionary Statements

Except for the historical information and discussions contained herein, statements contained in this release may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve a number of risks, uncertainties and other factors that could cause actual results to differ materially, including the following: a downturn in the economic environment and corporate IT spending budgets; the company's failure to meet growth and productivity objectives, a failure of the company's innovation initiatives; risks from investing in growth opportunities; failure of the company's intellectual property portfolio to prevent competitive offerings and the failure of the company to obtain necessary licenses; breaches of data protection; fluctuations in revenue and purchases, impact of local legal, economic, political and health conditions; adverse effects from environmental matters, tax matters and the company's pension plans; ineffective internal controls; the company’s use of accounting estimates; competitive conditions; the company’s ability to attract and retain key personnel and its reliance on critical skills; impact of relationships with critical suppliers; currency fluctuations and customer financing risks; impact of changes in market liquidity conditions and customer credit risk on receivables; reliance on third party distribution channels; the company’s ability to successfully manage acquisitions and alliances; risk factors related to IBM securities; and other risks, uncertainties and factors discussed in the company’s Form 10-Q, Form 10-K and in the company’s other filings with the U.S. Securities and Exchange Commission (SEC) or in materials incorporated therein by reference. The company assumes no obligation to update or revise any forward-looking statements.

Presentation of Information in this Press Release

In an effort to provide investors with additional information regarding the company’s results as determined by generally accepted accounting principles (GAAP), the company has also disclosed in this press release the following non-GAAP information which management believes provides useful information to investors:

IBM Results –

  • showing non-Global Financing debt-to-capitalization ratio;
  • adjusting for free cash flow;
  • adjusting for currency (i.e., at constant currency).

The rationale for management’s use of non-GAAP measures is included as part of the supplementary materials presented within the second-quarter earnings materials. These materials are available on the IBM investor relations Web site at www.ibm.com/investor and are being included in Attachment II (“Non-GAAP Supplementary Materials”) to the Form 8-K that includes this press release and is being submitted today to the SEC.

Conference Call and Webcast

IBM’s regular quarterly earnings conference call is scheduled to begin at 4:30 p.m. EDT, today. Investors may participate by viewing the Webcast at www.ibm.com/investor/2q09. Presentation charts will be available on the Web site prior to the Webcast.

Financial Results Below (certain amounts may not add due to use of rounded numbers; percentages presented are calculated from the underlying whole-dollar amounts).

INTERNATIONAL BUSINESS MACHINES CORPORATION
COMPARATIVE FINANCIAL RESULTS
(Unaudited; Dollars in millions except per share amounts)
 
  Three Months  

Six Months

Ended June 30,

Ended June 30,

    Percent     Percent
2009 2008 Change 2009 2008 Change
REVENUE
 
Global Technology
Services $ 9,108 $ 10,100 -9.8 % $ 17,862 $ 19,777 -9.7 %
Gross margin 34.8 % 31.6 % 34.3 % 31.5 %
 
Global Business
Services 4,338 5,107 -15.0 % 8,736 10,018 -12.8 %
Gross margin 27.2 % 25.8 % 26.8 % 25.4 %
 
Software 5,166 5,574 -7.3 % 9,705 10,421 -6.9 %
Gross margin 85.9 % 84.6 % 85.1 % 84.3 %
 
Systems and
Technology 3,855 5,212 -26.0 % 7,083 9,431 -24.9 %
Gross margin 37.1 % 38.6 % 35.7 % 37.9 %
 
Global Financing 568

634

-10.5

%

1,146

1,266

-9.5 %
Gross margin 47.1 % 55.3 % 46.5 % 53.1 %
 
Other 215 193 11.4 % 429 409 4.9 %
Gross margin 47.4 % 5.8 % 50.1 % -7.7 %
 
TOTAL REVENUE 23,250 26,820 -13.3 % 44,962 51,322 -12.4 %
 
 
GROSS PROFIT 10,581 11,599 -8.8 % 20,012 21,766 -8.1 %
Gross margin 45.5 % 43.2 % 44.5 % 42.4 %
 
 
EXPENSE AND OTHER INCOME
 
S,G&A 5,115 6,289 -18.7 % 10,379 11,909 -12.9 %
% of revenue 22.0 % 23.4 % 23.1 % 23.2 %
 
R,D&E 1,434 1,660 -13.6 % 2,914 3,229 -9.8 %
% of revenue 6.2 % 6.2 % 6.5 % 6.3 %
 
Intellectual property
and custom development

income

(302

) (285 ) 6.2 % (570 ) (559 ) 2.0 %
Other (income)
and expense (28 ) (24 ) 14.0 % (331 ) (149 ) 121.8 %
Interest expense 101 145 -30.7 % 237 323 -26.6 %
 
 
TOTAL EXPENSE AND
OTHER INCOME 6,319 7,786 -18.8 % 12,628 14,754 -14.4 %
% of revenue 27.2 % 29.0 % 28.1 % 28.7 %
 
INCOME BEFORE
INCOME TAXES 4,262 3,814 11.8 % 7,385 7,012 5.3 %
Pre-tax margin 18.3 % 14.2 % 16.4 % 13.7 %
 
Provision for

income taxes

1,159

1,049 10.5 %

1,986

1,928

3.0 %
Effective tax

rate

27.2

% 27.5 % 26.9 % 27.5 %
 

NET INCOME

$

3,103

 

$

2,765   12.2

%

$

5,398

 

$

5,084

  6.2 %

Net margin

13.3

% 10.3 % 12.0 % 9.9 %
 
EARNINGS PER SHARE
OF COMMON STOCK:
ASSUMING DILUTION $ 2.32 $1.97* 17.8 % $ 4.02 $3.61* 11.4 %
BASIC $ 2.34 $2.01* 16.4 % $ 4.04 $3.67* 10.1 %
 
WEIGHTED-AVERAGE NUMBER
OF COMMON SHARES
OUTSTANDING (M's):
ASSUMING DILUTION 1,336.9 1,402.1* 1,343.2 1,406.7*
BASIC 1,326.1 1,376.2* 1,335.2 1,385.2*
 
* Reflects the implementation of FSP EITF 03-6-1, 'Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities.'
INTERNATIONAL BUSINESS MACHINES CORPORATION
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(Unaudited)
   
 
(Dollars in Millions) At June 30, At December 31,
2009 2008
ASSETS
 
Current Assets:
Cash and cash equivalents $ 11,678 $ 12,741
Marketable securities 848 166
Notes and accounts receivable - trade (net of
allowances of $241 in 2009 and $226 in 2008) 9,561 10,906
Short-term financing receivables (net of
allowances of $400 in 2009 and $351 in 2008) 13,116 15,477
Other accounts receivable (net of
allowances of $57 in 2009 and $55 in 2008) 1,179 1,172
Inventories, at lower of average cost or market:
Finished goods 565 524
Work in process and raw materials   2,126     2,176  
Total inventories 2,691 2,701
Deferred taxes 1,652 1,542
Prepaid expenses and other current assets   3,709     4,299  
Total Current Assets 44,435 49,004
 
Plant, rental machines, and other property 38,669 38,445
Less: Accumulated depreciation   24,721     24,140  
Plant, rental machines, and other property - net 13,948 14,305
Long-term financing receivables (net of
allowances of $132 in 2009 and $179 in 2008) 10,197 11,183
Prepaid pension assets 2,182 1,601
Deferred taxes 6,762 7,270
Goodwill 18,737 18,226
Intangible assets - net 2,580 2,878
Investments and sundry assets   4,813     5,058  
Total Assets $ 103,655   $ 109,524  
LIABILITIES AND STOCKHOLDERS' EQUITY
 
Current Liabilities:
Taxes $ 2,259 $ 2,743
Short-term debt 8,504 11,236
Accounts payable 5,869 7,014
Compensation and benefits 3,901 4,623
Deferred income 10,335 10,239
Other accrued expenses and liabilities   5,562     6,580  
Total Current Liabilities 36,430 42,435
 
Long-term debt 20,868 22,689
Retirement and nonpension postretirement
benefit obligations 18,459 19,452
Deferred income 3,283 3,171
Other liabilities   9,141  

8,192

*

Total Liabilities 88,182

95,939

*

 
Equity:
Common stock 39,774 39,129
Retained earnings 74,328 70,353
Treasury stock (77,679 ) (74,171 )
Accumulated other comprehensive income/(loss)   (21,043 )   (21,845 )
Total IBM Corporation stockholders' equity 15,380

13,465

*

Noncontrolling interests*   94  

119

*

Total Stockholders' Equity   15,473  

13,584

*

Total Liabilities and Stockholders' Equity $ 103,655   $ 109,524  
 
* Reflects implementation of SFAS No. 160, 'Noncontrolling Interests in Consolidated Financial Statements -- an amendment of ARB No. 51.'
INTERNATIONAL BUSINESS MACHINES CORPORATION
CASH FLOW ANALYSIS
(Unaudited)
       
Three Months Ended Six Months Ended
(Dollars in Millions) June 30, June 30,
2009 2008 2009 2008
 
Net Cash from Operations $ 4,741 $ 4,251 $ 9,127 $ 8,453
 
Less: Global Financing (GF) Accounts
Receivable 430 (628 ) 3,014 1,769
 
Net Cash from Operations
(Excluding GF Accounts Receivable) 4,311 4,879 6,113 6,683
 
Net Capital Expenditures (864 ) (1,169 ) (1,624 ) (2,380 )
 
Free Cash Flow
(Excluding GF Receivables) 3,447 3,710 4,490 4,303
 
Acquisitions (79 ) (930 ) (100 ) (5,891 )
Divestitures 0 0 356 29
Share Repurchase (1,670 ) (4,736 ) (3,436 ) (7,164 )
Dividends (732 ) (685 ) (1,407 ) (1,239 )
Non-GF Debt (266 ) 395 (2,181 ) (1,325 )
Other (including GF Accounts Receivable,
GF Debt) (469 ) 67 1,898 4,988
 
Change in Cash & Marketable Securities $ 231 ($2,180 ) ($381 ) ($6,299 )
INTERNATIONAL BUSINESS MACHINES CORPORATION
SEGMENT DATA
(Unaudited)
         
SECOND-QUARTER 2009
(Dollars in Millions)

Revenue

Pre-tax Pre-tax
External Internal Total Income Margin
SEGMENTS
 
Global Technology Services $ 9,108 $ 343 $ 9,451 $ 1,405 14.9 %
Y-T-Y Change -9.8 % -12.1 % -9.9 % 41.3 %
 
Global Business Services 4,338 223 4,562 608 13.3 %
Y-T-Y Change -15.0 % -13.8 % -15.0 % -4.5 %
 
Software 5,166 614 5,780 1,852 32.0 %
Y-T-Y Change -7.3 % -14.6 % -8.2 % 24.1 %
 
Systems and Technology 3,855 244 4,098 333 8.1 %
Y-T-Y Change -26.0 % 13.1 % -24.5 % -16.7 %
 
Global Financing 568 447 1,014 465 45.8 %
Y-T-Y Change -10.5 % -14.9 % -12.5 % 8.6 %
 
TOTAL REPORTABLE SEGMENTS 23,035 1,870 24,905 4,663 18.7 %
Y-T-Y Change -13.5 % -11.3 % -13.3 % 18.0 %
 
Eliminations / Other 215 (1,870 ) (1,655 ) (401 )
 
TOTAL IBM CONSOLIDATED $ 23,250 $ 0 $ 23,250 $ 4,262 18.3 %
Y-T-Y Change -13.3 % -13.3 % 11.8 %
 
 
SECOND-QUARTER 2008
(Dollars in Millions)

Revenue

Pre-tax Pre-tax
External Internal Total Income Margin
SEGMENTS
 
Global Technology Services $ 10,100 $ 390 $ 10,489 $ 994 9.5 %
 
Global Business Services 5,107 259 5,366 637 11.9 %
 
Software 5,574 719 6,293 1,492 23.7 %
 
Systems and Technology 5,212 215 5,427 400 7.4 %
 
Global Financing 634 525 1,159 428 36.9 %
 
TOTAL REPORTABLE SEGMENTS 26,626 2,108 28,734 3,951 13.8 %
 
Eliminations / Other 193 (2,108 ) (1,915 ) (138 )
 
TOTAL IBM CONSOLIDATED $ 26,820 $ 0 $ 26,820 $ 3,814 14.2 %
INTERNATIONAL BUSINESS MACHINES CORPORATION
SEGMENT DATA
(Unaudited)
         
SIX-MONTHS 2009
(Dollars in Millions)

Revenue

Pre-tax Pre-tax
External Internal Total Income Margin
SEGMENTS
 
Global Technology Services $ 17,862 $ 685 $ 18,547 $ 2,509 13.5 %
Y-T-Y Change -9.7 % -12.0 % -9.8 % 26.6 %
 
Global Business Services 8,736 456 9,191 1,130 12.3 %
Y-T-Y Change -12.8 % -11.8 % -12.8 % -7.1 %
 
Software 9,705 1,227 10,933 3,186 29.1 %
Y-T-Y Change -6.9 % -11.5 % -7.4 % 15.5 %
 
Systems and Technology 7,083 420 7,503 361 4.8 %
Y-T-Y Change -24.9 % 2.3 % -23.8 % -33.7 %
 
Global Financing 1,146 836 1,982 825 41.6 %
Y-T-Y Change -9.5 % -8.2 % -9.0 % 1.1 %
 
TOTAL REPORTABLE SEGMENTS 44,533 3,624 48,156 8,011 16.6 %
Y-T-Y Change -12.5 % -9.5 % -12.3 % 9.5 %
 
Eliminations / Other 429 (3,624 ) (3,195 ) (627 )
 
TOTAL IBM CONSOLIDATED $ 44,962 $ 0 $ 44,962 $ 7,385 16.4 %
Y-T-Y Change -12.4 % -12.4 % 5.3 %
 
 
SIX-MONTHS 2008
(Dollars in Millions)

Revenue

Pre-tax Pre-tax
External Internal Total Income Margin
SEGMENTS
 
Global Technology Services $ 19,777 $ 778 $ 20,555 $ 1,982 9.6 %
 
Global Business Services 10,018 517 10,535 1,216 11.5 %
 
Software 10,421 1,386 11,807 2,759 23.4 %
 
Systems and Technology 9,431 410 9,841 546 5.5 %
 
Global Financing 1,266 911 2,177 816 37.5 %
 
TOTAL REPORTABLE SEGMENTS 50,913 4,002 54,915 7,319 13.3 %
 
Eliminations / Other 409 (4,002 ) (3,593 ) (307 )
 
TOTAL IBM CONSOLIDATED $ 51,322 $ 0 $ 51,322 $ 7,012 13.7 %
IBM
Michael Fay, 914-499-6107

mikefay@us.ibm.com

or
John Bukovinsky, 732-618-3531

jbuko@us.ibm.com

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