International Business Machines Corp. (IBM)
Q3 2008 Earnings Call Transcript
October 16, 2008 4:30 p.m. ET

Executives

Patricia Murphy - Vice President, Investor Relations
Mark Loughridge - Chief Financial Officer and Senior Vice President

Analysts

Richard Gardner - Citigroup
Toni Sacconaghi - Sanford C. Bernstein
David Grossman - Thomas Weisel Partners
David Bailey - Goldman Sachs
Ben Reitzes - Barclays Capital
Louis Miscioscia - Cowen & Company, LLC
Bill Shope - Credit Suisse
Mark Moskowitz – J.P. Morgan & Co.
Chris Whitmore - Deutsche Bank
Keith Bachman - BMO Capital Markets

Presentation

Operator

Welcome and thank you for standing by. At this time, all participants are in a listen-only mode. Today’s conference is being recorded. If you have any objections you may disconnect at this time. Now, I will turn the meeting over to Ms. Patricia Murphy, Vice President of Investor Relations. Ma’am, you may begin.

Patricia Murphy

Thank you. This is Patricia Murphy, Vice President of Investor Relations for IBM. I’m here with Mark Loughridge, IBM’s Senior Vice President and Chief Financial Officer. Thank you for joining our third quarter earnings presentation.

The prepared remarks will be available in roughly an hour, and a replay of this webcast will be posted to our Investor Relations website by this time tomorrow.

Our presentation includes certain non-GAAP financial measures in an effort to provide additional information to investors. All non-GAAP measures have been reconciled to their related GAAP measures in accordance with SEC rules. You will find the reconciliation charts at the end and in the Form 8-K submitted to the SEC.

Let me remind you that certain comments made in this presentation may be characterized as forward looking under the Private Securities Litigation Reform Act of 1995. Those statements involve a number of factors that could cause actual results to differ materially. Additional information concerning these factors is contained in the Company’s filings with the SEC. Copies are available from the SEC, from the IBM website, or from us in Investor Relations.

Now, I’ll turn the call over to Mark Loughridge.

Mark Loughridge

Thanks for joining us today. Last week, we reported our third quarter revenue, profit, earnings per share, and free cash flow results. At that time, we also reaffirmed our full year guidance. Today, I want to take you through the details behind the results.

This is a tough environment, but we were ready for it. We are executing a play that we called some time ago. It has two major elements. First, we have been investing to capture opportunities in the emerging markets. You can see the benefit in our results again this quarter with double-digit revenue growth and good returns. Second, in the more established markets our goal has been to drive productivity. We’ve been systematically attacking our spending base, taking out infrastructure costs, reducing our cost and expense levels, and improving our efficiency. Because of these actions we have a more efficient structure. So in the third quarter, when the revenue growth in the major markets slowed, we had great margin performance and hit our profit objectives.

These ongoing actions to address spending shore up the base in tough times, but they also improve our balance point over the long run. Our focus on continuous improvement is an element of our model and an important driver of our 2010 earnings-per-share roadmap.

Now there’s another important aspect of our model, and that’s the balance between annuity and transaction-type businesses. We have a number of annuity businesses like outsourcing, maintenance, and the majority of software that not only provide a good revenue foundation but also provide a steady source of profit and cash. We’ve been building these businesses and their recurring revenue streams for years. They’re part of our DNA and they provide a distinct advantage in today’s environment.

So our annuity base, together with our ongoing structural changes in the business, resulted in solid profit performance in the quarter. We’ve been focused on this for some time, and it was clearly the right game plan for the third quarter. We’ll continue this same operational plan in the fourth quarter and into 2009, as we focus on delivering solid profit and cash.