IBM Reports 2010 First-Quarter Results

IBM Reports 2010 First-Quarter Results

IBM

  • Diluted earnings per share of $1.97, up 16 percent;
  • Revenue of $22.9 billion, up 5 percent, flat adjusting for currency;
  • Net income of $2.6 billion, up 13 percent;
  • Pre-tax income of $3.5 billion, up 13 percent;
  • Pre-tax margin of 15.4 percent, up 1 point;
  • Gross profit margin of 43.6 percent, up 0.2 point;
  • Free cash flow of $1.4 billion, up approximately $400 million;
  • Software revenue up 11 percent;
  • Systems and Technology revenue up 5 percent;
  • Services revenue up 4 percent;
  • Services signings of $12.3 billion, down 2 percent;
  • Consulting services signings up 18 percent;
  • Strategic Outsourcing signings up 6 percent;
  • Services backlog of $134 billion, up $8 billion year to year;
  • Full-year 2010 earnings-per-share expectations raised to at least $11.20.

IBM (NYSE: IBM) today announced first-quarter 2010 diluted earnings of $1.97 per share compared with diluted earnings of $1.70 per share in the first quarter of 2009, an increase of 16 percent.

First-quarter net income was $2.6 billion compared with $2.3 billion in the first quarter of 2009, an increase of 13 percent. Total revenues for the first quarter of 2010 of $22.9 billion increased 5 percent (flat, adjusting for currency) from the first quarter of 2009.

“In the first quarter, we drove significantly improved revenue growth rates from the fourth quarter across our businesses and geographies. We had strong results in strategic investment areas including growth markets, business analytics and Smarter Planet solutions,” said Samuel J. Palmisano, IBM chairman, president and chief executive officer.

“Looking ahead, we are confident in our ability to grow revenue, and given our mix of higher-value business and productivity we will expand margins, grow profit, cash and EPS, and increase returns to shareholders. Thus, we expect full-year 2010 diluted earnings per share of at least $11.20.”

The company also said it expects constant-currency revenue growth for IBM and for its total services, software and hardware businesses in the second quarter.

From a geographic perspective, the Americas’ first-quarter revenues were $9.5 billion, an increase of 2 percent (flat, adjusting for currency) from the 2009 period. Revenues from Europe/Middle East/Africa were $7.6 billion, up 5 percent (down 2 percent, adjusting for currency). Asia-Pacific revenues increased 10 percent (1 percent, adjusting for currency) to $5.3 billion. OEM revenues were $543 million, up 18 percent compared with the 2009 first quarter. Revenues from the company’s growth markets organization increased 20 percent (8 percent, adjusting for currency) and represented 19 percent of geographic revenues.

Total Global Services revenues increased 4 percent (down 2 percent, adjusting for currency). Global Technology Services segment revenues increased 6 percent (flat, adjusting for currency) to $9.3 billion. Global Business Services segment revenues were flat (down 5 percent, adjusting for currency) at $4.4 billion.

IBM signed services contracts totaling $12.3 billion, at actual rates, a decrease of 2 percent (7 percent, adjusting for currency), including 13 contracts greater than $100 million.

Application Management signings decreased 23 percent, or approximately $700 million. Without the impact of this decline, total services signings would have been up 4 percent year to year.

Signings in Transactional services (Consulting, Integrated Technology Services and Application Management Systems Integration) were $5.5 billion, a decrease of 1 percent (6 percent, adjusting for currency). Total Outsourcing services (Strategic Outsourcing and Application Management Outsourcing) signings decreased 3 percent (8 percent, adjusting for currency) to $6.8 billion.

Consulting services signings were up 18 percent, with 25 percent of signings related to Smarter Planet and Business Analytics. Strategic Outsourcing signings increased 6 percent.

The estimated services backlog at March 31 was $134 billion at actual rates compared with $126 billion in the first-quarter 2009.

Revenues from the Software segment were $5.0 billion, an increase of 11 percent (5 percent, adjusting for currency) compared with the first quarter of 2009. Revenues from IBM’s key middleware products, which include WebSphere, Information Management, Tivoli, Lotus and Rational products, were $2.8 billion, an increase of 13 percent (8 percent, adjusting for currency) versus the first quarter of 2009. Operating systems revenues of $499 million increased 1 percent (down 3 percent, adjusting for currency) compared with the prior-year quarter.

Revenues from the WebSphere family of software products, which delivers capabilities that enable clients to integrate and manage business processes across the organization, increased 13 percent year over year. Revenues from Information Management software, which enables clients to integrate, manage and use information to gain business value, increased 11 percent. Revenues from Tivoli software, which helps clients manage technology and business assets by providing visibility, control and automation across the organization, increased 23 percent, and revenues from Lotus software, which connects people and processes for more effective communication and increased productivity through collaboration, messaging and social networking software, increased 1 percent. Revenues from Rational software, which supports software development for both IT and embedded system solutions, increased 7 percent.

Revenues from the Systems and Technology segment totaled $3.4 billion for the quarter, up 5 percent (2 percent, adjusting for currency) from the first quarter of 2009. Systems revenues increased 4 percent (1 percent, adjusting for currency). Revenues from the System x increased 36 percent. Revenues from POWER Systems decreased 17 percent compared with the 2009 period. Revenues from System z mainframe server products decreased 17 percent compared with the year-ago period. Total delivery of System z computing power, as measured in MIPS (millions of instructions per second), decreased 19 percent. Revenues from System Storage increased 11 percent, and revenues from Retail Store Solutions increased 38 percent. Revenues from Microelectronics OEM increased 16 percent.

Global Financing segment revenues decreased 7 percent (12 percent, adjusting for currency) in the first quarter to $537 million.

The company’s total gross profit margin was 43.6 percent in the 2010 first quarter compared with 43.4 percent in the 2009 first-quarter period, led by improving margins in both services segments and software.

Total expense and other income increased 2 percent to $6.5 billion compared with the prior-year period. In each period, the company had gains from the sale of business operations that were largely offset by workforce rebalancing charges. SG&A expense of $5.7 billion increased 8 percent year over year and included workforce rebalancing charges of approximately $560 million, the majority of which was in Europe and Asia, compared with prior-year expense of $5.3 billion that included $265 million of workforce rebalancing charges. RD&E expense of $1.5 billion increased 2 percent compared with the year-ago period. Intellectual property and custom development income decreased to $261 million compared with $268 million a year ago. Other (income) and expense was income of $545 million including a gain of $591 million from the sale of Product Lifecycle Management operations, compared with prior-year income of $304 million that included $298 million from the sale of certain elements of the company’s logistics process operations. Interest expense decreased to $82 million compared with $136 million in the prior year.

IBM’s tax rate in the first-quarter 2010 was 26.0 percent compared with 26.5 percent in the first quarter of 2009.

The weighted-average number of diluted common shares outstanding in the first-quarter 2010 was 1.32 billion compared with 1.35 billion shares in the same period of 2009. As of March 31, 2010, there were 1.28 billion basic common shares outstanding.

Debt, including Global Financing, totaled $26.3 billion, compared with $26.1 billion at year-end 2009. From a management segment view, Global Financing debt totaled $22.2 billion versus $22.4 billion at year-end 2009, resulting in a debt-to-equity ratio of 7.0 to 1. Non-global financing debt totaled $4.1 billion, an increase of $357 million since year-end 2009, resulting in a debt-to-capitalization ratio of 17.7 percent from 16.0 percent.

IBM ended the first-quarter 2010 with $14.0 billion of cash on hand and generated free cash flow of $1.4 billion, up approximately $400 million year over year. The company returned $4.7 billion to shareholders through $0.7 billion in dividends and $4.0 billion of share repurchases. The balance sheet remains strong, and the company is well positioned to support its full-year objectives.

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 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 security; 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; 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 –

  • presenting 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 first-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/1q10. Presentation charts will be available on the Web site shortly before 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 Ended March 31,
    Percent
2010 2009 Change
REVENUE
 
Global Technology Services $ 9,306 $ 8,754 6.3 %
Gross profit margin 34.4 % 33.9 %
 
Global Business Services 4,410 4,397 0.3 %
Gross profit margin 27.3 % 26.5 %
 
Software 5,018 4,539 10.6 %
Gross profit margin 84.6 % 84.2 %
 
Systems and Technology 3,385 3,228 4.9 %
Gross profit margin 33.6 % 34.0 %
 
Global Financing 537 578 -7.1 %
Gross profit margin 49.8 % 45.9 %
 
Other 200 213 -6.5 %
Gross profit margin -35.7 % 52.7 %
 
TOTAL REVENUE 22,857 21,711 5.3 %
 
 
GROSS PROFIT 9,976 9,431 5.8 %
Gross profit margin 43.6 % 43.4 %
 
 
EXPENSE AND OTHER INCOME
 
S,G&A 5,677 5,264 7.8 %
Expense to revenue 24.8 % 24.2 %
 
R,D&E 1,509 1,480 2.0 %
Expense to revenue 6.6 % 6.8 %
 
Intellectual property
and custom development
income (261 ) (268 ) -2.4 %
Other (income) and expense (545 ) (304 ) 79.6 %
Interest expense 82 136 -39.6 %
 
TOTAL EXPENSE AND
OTHER INCOME 6,462 6,309 2.4 %
Expense to revenue 28.3 % 29.1 %
 
INCOME BEFORE
INCOME TAXES 3,515 3,122 12.6 %
Pre-tax margin 15.4 % 14.4 %
 
Provision for
income taxes 914 827 10.4 %
Effective tax rate 26.0 % 26.5 %
 
NET INCOME $ 2,601   $ 2,295   13.3 %
Net margin 11.4 % 10.6 %
 
EARNINGS PER SHARE
OF COMMON STOCK:
ASSUMING DILUTION $ 1.97 $ 1.70 15.9 %
BASIC $ 2.00 $ 1.71 17.0 %
 
WEIGHTED-AVERAGE NUMBER
OF COMMON SHARES
OUTSTANDING(M's):
ASSUMING DILUTION 1,321.6 1,349.5
BASIC 1,301.2 1,344.3
 
INTERNATIONAL BUSINESS MACHINES CORPORATION
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(Unaudited)
 
(Dollars in Millions)   At March 31,   At December 31,
2010 2009
ASSETS
 
Current Assets:
Cash and cash equivalents $ 12,472 $ 12,183
Marketable securities 1,505 1,791
Notes and accounts receivable - trade
(net of allowances of $214 in 2010 and $217
in 2009) 9,324 10,736
Short-term financing receivables
(net of allowances of $415 in 2010 and $438
in 2009) 13,083 14,914
Other accounts receivable
(net of allowances of $9 in 2010 and $15
in 2009) 1,104 1,143
Inventories, at lower of average cost or market:
Finished goods 555 533
Work in process and raw materials   1,969     1,960  
Total inventories 2,524 2,494
Deferred taxes 1,565 1,730
Prepaid expenses and other current assets   4,121     3,946  
Total Current Assets 45,697 48,935
 
Plant, rental machines, and other property 39,018 39,596
Less: Accumulated depreciation   25,178     25,431  
Plant, rental machines, and other property - net 13,841 14,165
Long-term financing receivables
(net of allowances of $94 in 2010 and $97
in 2009) 9,542 10,644
Prepaid pension assets 3,289 3,001
Deferred taxes 3,537 4,195
Goodwill 20,889 20,190
Intangible assets - net 2,618 2,513
Investments and sundry assets   5,794     5,379  
Total Assets $ 105,208   $ 109,022  
LIABILITIES AND EQUITY
 
Current Liabilities:
Taxes $ 2,775 $ 3,826
Short-term debt 5,014 4,168
Accounts payable 6,345 7,436
Compensation and benefits 3,701 4,505
Deferred income 11,456 10,845
Other accrued expenses and liabilities   5,285     5,223  
Total Current Liabilities 34,575 36,002
 
Long-term debt 21,305 21,932
Retirement and nonpension postretirement
benefit obligations 15,216 15,953
Deferred income 3,456 3,562
Other liabilities   8,506     8,819  
Total Liabilities 83,059 86,267
 
Contingencies and Commitments
 
Equity:
IBM Stockholders' Equity:
Common stock 42,665 41,810
Retained earnings 82,783 80,900
Treasury stock -- at cost (85,238 ) (81,243 )
Accumulated other comprehensive income/(loss)   (18,178 )   (18,830 )
Total IBM stockholders' equity 22,033 22,637
 
Noncontrolling interests   116     118  
Total Equity   22,149     22,755  
Total Liabilities and Equity $ 105,208   $ 109,022  
 
INTERNATIONAL BUSINESS MACHINES CORPORATION
CASH FLOW ANALYSIS
(Unaudited)
 
(Dollars in Millions)   Three Months Ended
March 31,
2010   2009
Net Cash from Operations $ 4,437 $ 4,386
 
Less: Global Financing (GF)
Accounts Receivable 2,101 2,584
 
Net Cash from Operations
(Excluding GF Accounts Receivable) 2,335 1,802
 
Net Capital Expenditures (904 ) (760 )
 
Free Cash Flow
(Excluding GF Accounts Receivable) 1,432 1,043
 
Acquisitions (824 ) (21 )
Divestitures 0 356
Share Repurchase (4,017 ) (1,765 )
Dividends (718 ) (675 )
Non-GF Debt 341 (1,915 )
Other (including GF Accounts Receivable,
GF Debt) 3,789 2,367
 
Change in Cash and Marketable Securities $ 3 ($612 )
 
INTERNATIONAL BUSINESS MACHINES CORPORATION
SEGMENT DATA
(Unaudited)
 
  FIRST-QUARTER 2010
      Pre-tax  
(Dollars in Millions) Revenue Income/ Pre-tax
External Internal Total (Loss) Margin
SEGMENTS
 
Global Technology Services $ 9,306 $ 320 $ 9,626 $ 964 10.0 %
% change 6.3 % -6.4 % 5.8 % -12.6 %
 
Global Business Services 4,410 203 4,613 445 9.7 %
% change 0.3 % -12.5 % -0.4 % -14.6 %
 
Software 5,018 758 5,776 2,052 35.5 %
% change 10.6 % 23.5 % 12.1 % 53.7 %
 
Systems and Technology 3,385 173 3,559 (170 ) -4.8 %
% change 4.9 % -1.6 % 4.5 % nm
 
Global Financing 537 403 941 427 45.4 %
% change -7.1 % 3.5 % -2.9 % 18.7 %
 
TOTAL REPORTABLE SEGMENTS 22,657 1,858 24,515 3,719 15.2 %
% change 5.4 % 5.9 % 5.4 % 11.1 %
 
Eliminations / Other 200 (1,858 ) (1,658 ) (205 )
 
TOTAL IBM CONSOLIDATED $ 22,857 $ 0 $ 22,857 $ 3,515 15.4 %
% change 5.3 % 5.3 % 12.6 %
 
nm – not meaningful
 
 
FIRST-QUARTER 2009
Pre-tax
(Dollars in Millions) Revenue Income/ Pre-tax
External Internal Total (Loss) Margin
SEGMENTS
 
Global Technology Services $ 8,754 $ 342 $ 9,096 $ 1,104 12.1 %
 
Global Business Services 4,397 232 4,629 521 11.3 %
 
Software 4,539 614 5,153 1,335 25.9 %
 
Systems and Technology 3,228 176 3,404 28 0.8 %
 
Global Financing 578 390 968 360 37.2 %
 
TOTAL REPORTABLE SEGMENTS 21,498 1,754 23,251 3,348 14.4 %
 
Eliminations / Other 213 (1,754 ) (1,540 ) (226 )
 
TOTAL IBM CONSOLIDATED $ 21,711 $ 0 $ 21,711 $ 3,122 14.4 %

IBM
Mike Fay, 914-499-6107Mike Fay, 914-499-6107
mikefay@us.ibm.com
oror
John Bukovinsky, 732-618-3531John Bukovinsky, 732-618-3531
jbuko@us.ibm.com

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