This summary is based on the second quarter fiscal 2007 earnings call conducted by International Business Machines Corp. (IBM) on July 18, 2007.
Chief Financial Officer: Mark Loughridge
Vice President, Investor Relations: Patricia Murphy
Key Investors Issues
- Earnings per share rose to $1.55 from $1.30 in the prior year quarter.
- Quarterly revenue grew to $23.8 billion, up 9% from previous year.
- IBM increased its quarterly dividend by 10 cents a share or 33%.
Second Quarter Fiscal 2007 Financial Highlights
For the quarter, the diluted earnings were $1.55 per share from continuing operations, an increase of 19% compared with diluted earnings of $1.30 per share in the second quarter of 2006.
This includes 5 cents per share for a pre-tax gain of $81 million relating to the sale of the Printing Systems Division (PSD). Diluted earnings for the second-quarter 2007 were $1.50 per share, excluding this gain, an increase of 15% year over year.
Second-quarter income from continuing operations was $2.3 billion, including the gain from the sale of PSD, compared with $2 billion in the second quarter of 2006, an increase of 12%. Without the gain, income from continuing operations of $2.2 billion in the second quarter of 2007 increased $167 million, or 8% versus the prior year.
The revenue was $23.8 billion, an increase of 9% as reported and 6% of constant currency.
This is the best constant currency revenue growth that the firm has had in over 6 years. Americas’ revenue grew 5% at constant currency. The firm had expected improvement in the U.S. in the second quarter. The US growth improved to 6 percent.
The firm had very powerful results outside the US as well. Europe continued to improve, up 13% as reported and 6% at constant currency. Most major countries performed well, including Spain, the UK, and Italy. Germany also grew with solid results for the second consecutive quarter, benefiting from an improving economy and better sales execution.
Asia Pacific again had the best performance with 10% growth. The Asia Pacific economy remained very strong, led by India, ASEAN, and a steady recovery in Japan. The company had solid contribution from all regions. In fact, three regions posted growth of 21%, 19%, and 16%, and Japan grew for the third consecutive quarter at constant currency.
The company’s strategies to focus on higher growth emerging countries are paying off. In fact, the company’s emerging countries - Brazil, Russia, India and China - grew 25% at constant currency. These countries now are 5% of IBM''s revenue and contributed one point of growth to the IBM total. Both China and India are up over 30% and the firm believes that it gained share in those countries. Brazil grew 9% and Russia was up a very powerful 52%. These emerging countries are among the fastest growing IT markets in world and the firm is investing to capture this growth.
The company expanded gross profit margins to 41.8%.
It was the 12th consecutive quarter of year-to-year improvement. The gross margin improved six-tenths of a point year-to-year. Approximately two-thirds of the improvement is operational efficiencies, while the remaining one-third is mix shift to higher margin businesses.
- Global Business Services continued the positive trend, with the improvement driven by better utilization, strong contract management, and improving pricing trends. These contributed about a third of that improvement each.
- The Software margin expansion was driven by strong revenue growth with a fixed cost structure.
- Systems and Technology margin improved in each of the server brands as customers consolidate and virtualize workloads on the high-end.
- Global Technology Services was flat again, but it was up sequentially. The firm has taken action to improve the cost profile in the US.
- Global Financing declined, and this was a function of narrowing financing spreads and increased interest costs.
Expense was up 11% driven by investments in sales resource, acquisitions and mix to higher value businesses.
Excluding the $81 million gain from the printer sale, expense was up 12%. The increase in expense is a reflection of the changing mix of IBM’s business. Higher value businesses contribute to higher gross margin, but they also require higher operating expense.
Of the 12% growth in the second quarter, approximately three points of growth was due to currency and the firm estimates that about five points of the growth is from acquisitions. Of the five remaining points, one point is driven by increase in interest expense to fund the Accelerated Share Repurchase. The remaining four points is from investments in software and services business, and emerging markets. The returns on these investments are reflected in the momentum in the firm’s key middleware brands, growth in emerging markets, and improving services signings.
