This summary is based on the first quarter fiscal 2008 earnings call conducted by International Business Machines Corp. (IBM) on April 16, 2008.
Management:
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Vice President, Investor Relations: Patricia Murphy
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Chief Financial Officer, Senior Vice President: Mark Loughridge
Key Investors Issues
- Revenues rose 11% to $24.5 billion from $22 billion in the prior year.
- Earnings were up 36% to $2.31 billion or $1.65 a share from $1.84 billion or $1.21 a share in 2007.
- The firm returned $3 billion to shareholders with share repurchase of $2.4 billion and dividends of almost $600 million.
First Quarter Highlights
The firm delivered revenue of $24.5 billion, an increase of 11% from $22 billion as reported in the prior year as gross margin was up 1.2 points, with increases in services, systems and software.
- Revenue from industry sales units was up 12%, as all sectors were up, led by communications sector, up 16, driven by the telecom industry, as the firm helps clients transform their infrastructure and build out their data centers using green technologies.
- Financial services revenue was up 14%, with the firm returning to growth in the U.S. and outside of the U.S. where it generated three-fourths of the business, growing in all industries, i.e. banking, financial markets, and insurance.
Earnings were $2.31 billion or $1.65 a share, up 36% from $1.84 billion or $1.21 a share in the prior year on a mixture of revenue growth and efficient cost control.
- Expense was up 11% to $7 billion, with growth driven by currency, acquisitions, and additional interest expense for last year’s accelerated share repurchase.
- With an $85 billion spend base, the firm has a lot of opportunity to take out cost and expense and drive productivity across the business, having set aggressive targets to reduce spending for the infrastructure organizations.
- Retirement-related plans generated about $450 million of cost and expense in the quarter, a savings of about $190 million year to year.
Hedging losses in other income and expense were higher year to year by approximately $80 million and these losses mitigate the positive benefit of currency translation throughout the income statement.
- Margins were up in both services businesses, continuing to make progress on the 2010 roadmap, with Global Technology Services driven by strong profit growth in the strategic outsourcing and ITS.
- The consulting business drove margin expansion in Global Business Services and software margins improved, due primarily to good cost and expense management.
- Despite revenue declines, both gross and pre-tax margin improved in the Systems and Technology segment.
Free cash flow was $600 million, up $800 million over last year and adjusting for the $500 million contribution to the U.S. retiree medical trust last year, free cash flow was up $300 million.
- This performance was driven by strong net income and good working capital management, especially accounts receivable, where days sales outstanding improved seven-tenths days year to year.
- Significant cash applications included the purchase of Cognos for $4.8 billion, and six smaller acquisitions, including Arsenal Digital Solutions, Net Integration Technologies, and Solid Information Technologies.
- IBM funded capital investments of $1.2 billion and reduced non-global financing debt by $1.7 billion.
- It also returned $3 billion to shareholders with share repurchase of $2.4 billion and dividends of almost $600 million.
In February, the board approved further returns to shareholders with a share repurchase authorization of $15 billion and the firm expects to spend up to $12 billion on share repurchase in 2008.
- Cash on hand was $12 billion, with the cash balance declining $4.1 billion from year-end, due primarily to the investment in Cognos.
- Non-financing debt decreased to $8.9 billion and the debt to total capital is 26%, down from 30% at year-end 2007 and within the long-term objective of 20% to 30%.
Market Pespectives:
- Clients want to be able to realize a faster payback on their investment, so projects that deliver short-term savings did very well.
- Customer interest also remains strong for solutions that address specific client needs, such as risk management, and security, and energy efficiency.
- Growth also remains strong in the emerging markets, and the firm focused on building out the infrastructures in these countries.
Areas that did not do well include, System X, a high-volume transaction business and the technology OEM business, where there was decreased demand, but given that these areas are lower margin businesses, they had little impact on bottom line results.
- The annuity businesses, which drive about half of the revenue, provide a solid base of profit and cash.
- The firm continues to focus on cost and expense management and expanded gross margin year to year and has a disciplined approach to aligning investments to growth.
- IBM continued to execute its acquisition strategy and successfully closed the acquisition of Cognos.
Geographical Highlights:
- Asia-Pacific revenue outside of Japan grew 18%, or 10% at constant currency, as the economies of these countries continue their rapid pace of growth.
- Growth in Europe was consistent with performance over the last few quarters, reflecting a moderate IT spend environment.
- The big improvement in the quarter was in the Americas, led by the U.S.which accelerated from 2% in the prior quarter to 6% following good contribution from the annuity businesses, and strong acceptance of the z10 mainframe.
In markets outside the United States, demand continues to be dominated by infrastructure build-out projects in telco, banking, and retail.
