This summary is based on the fourth quarter earnings call conducted by International Business Machines. (IBM) on 20 January, 2009.
Executives:
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SVP & CFO: Mark Loughridge
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VP, IR: Patricia Murphy
Key Investors Issues
- Revenue was $27 billion, down 6% from $28.9 billion in the prior year.
- Net income grew 12% delivering $4.4 billion or $3.28 a share, up from $4 billion or $2.80 a share in 2007.
Full Year Highlights:
- The firm delivered $103.6 billion of revenue 5% from $99 billion in 2007
- Earnings of $16.7 billion or $8.93 a share, up 18%.
- IBM returned over $13 billion to shareholders through share repurchases and dividends.
Fourth Quarter Highlights
Revenue was $27 billion, down 6% from $28.9 billion in the prior year due to weak performance across segments impacted by currency and the economic environment.
- Gross margin expanded three points, led by services and software and together with focused expense management, grew pre-tax income 6% over last year, and PTI margin expanded 2.5 points.
- By business, Global Technology Services was up over four points; Global Business Services was up 3.6 points; and Software was up over four points.
- And this was on software revenue growth of 9% at constant currency, driven by sales execution, and growth in mission critical production software.
- Within that, Strategic Outsourcing signings were up 20%, with North America up 44%.
Total geographic revenue was down 6% as reported and flat at constant currency, with mixed performance by geography.
- Americas had the strongest performance, up 2%, while Europe and Asia Pacific were down 1%.
- Globally, the major markets declined 1%, though some countries performed very well i.e. Germany had the fastest growth of the G7 countries with 7% growth.
- In the emerging markets, growth markets organization grew 6% and represented 18% of IBM’s geographic revenue in the quarter, and the year.
- The BRIC countries, a subset of growth markets, grew 13%, with strong double-digit growth in Brazil and India while Russia declined as it was significantly impacted by credit limitations.
Public sector was the fastest growing sector with strength in government and with education returning to growth at constant currency.
- In addition to solid revenue growth, it also had good signings in the public sector, up 50% worldwide and over 100% in the U.S.
- Lagging overall performance was the Industrial sector, as concerns with the credit markets and margin pressures continued.
- Worldwide Financial Services declined 1% at constant currency, in line with IBM’s overall performance for the fifth consecutive quarter as clients remain focused on cost reduction, risk management, and integration services.
- Revenue from our small and medium business clients declined 3% at constant currency; however services signings were up 10% globally, with U.S. signings up almost 90%.
With a lower tax rate year to year, primarily driven by utilization of tax credits, margin expanded to 16.4% and net income grew 12% delivering $4.4 billion or $3.28 a share, up from $4 billion or $2.80 a share in 2007.
- IBM finished the quarter with almost $13 billion of cash on hand, and had continued good performance in the capital markets in the fourth quarter. Our liquidity position remains strong.
- Gross margin expansion was driven by a combination of three elements; mixing to higher value businesses, pricing for value, and focus on cost management.
- And in expense, the firm focused on driving productivity, in sales, development, and global support functions.
Workforce reduction charges were up about $380 million year to year, an impact of 20 cents per share, including about $120 million for the activity in Japan.
- Interest income was down $120 million, reflecting the current interest rate environment and currency negatively impacted results, partially offset by the hedging programs.
- It reduced the CP balance by paying off $4 billion of the $4.5 billion that was outstanding at the end of September, finishing with less than $500 million of outstanding CP at the end of the year.
- In addition, it retired $1 billion of debt from the 2009 maturities.
- Total debt of almost $34 billion is down $1.3 billion year to year and down $500 million in the quarter.
Segment Highlights:
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Global Business Services pre-tax profit was up 26% and margin expanded 3.6 points to 14.9%, the best ever.
- This demonstrates strong operating discipline, the benefits of a globally integrated operating model, stable pricing, and lower managed labor costs.
- Despite slower revenue growth, utilization actually improved year to year, which is a function of resource optimization, and the balancing of domestic, global, and subcontracted resources.
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Software Segment Software revenue of $6.4 billion was up 3% year to year, or 9% at constant currency.
- Branded middleware was 61% of total software portfolio, and grew 6% year to year, or 13% at constant currency, as WebSphere, Information Management, Lotus, and Tivoli software sold well.
- Since the launch of the Information on Demand initiative in early 2006, Information Management software has grown at a compounded rate of 18% over the last 12 quarters.
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Systems & Technology revenue of $5.4 billion was down 20% year to year, or 16% at constant currency.
- The system z and converged system p servers did well, but the x86 platform declined.
- Virtualization, which provides the ability to run multiple workloads on a server, is a key enabler of efficiency.
- System z is the ultimate platform for virtualization, able to support thousands of images and run fully utilized.
- The POWER architecture supports hundreds of partitions, often driving utilization rates of over 60%.
Performance Drivers:
- With innovation and global integration at the core of this change, the firm is driving a shift to higher value businesses and investing for growth in emerging markets.
- It is integrating solutions that address clients’ needs in any environment; and improving efficiency which drives higher profit margins.
- The firm has a much less dependence on the cyclical and commoditizing products that are most affected in the downturn.
- In services, it has a much more flexible labor model that can adapt to changing market environments, and much of the software is embedded in the fabric of clients’ IT infrastructures.
