International Business Machines Corp. (IBM)
Q2 2011 Earnings Call Transcript
July 18, 2011 4:30 p.m. ET

Executives

Patricia Murphy – Vice President, Investor Relations
Mark Loughridge – Senior Vice President and Chief Financial Officer, Finance and Enterprise Transformation

Analysts

Bill Shoppe – Goldman Sachs
Toni Sacconaghi – Sanford C. Bernstein
Benjamin Reitzes – Barclays Capital
Kathryn Huberty – Morgan Stanley
Chris Whitmore – Deutsche Bank
Scott Craig – Bank of America/Merrill Lynch
Richard Gardner – Citigroup
Robert Cihra – Caris & Company
Mark Moskowitz – JPMorgan Chase
David Grossman – Stifel Nicolaus

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 am here with Mark Loughridge, IBM’s Senior Vice President and Chief Financial Officer, Finance and Enterprise Transformation. Thank you for joining our second-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 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 will turn the call over to Mark Loughridge.

Mark Loughridge

Thanks for joining us today. In the second quarter, we delivered revenue growth of 12%, and operating earnings per share of $3.09, up 18% year-to-year. With this performance, we are increasing our full year 2011 expectation for operating earnings per share to at least $13.25, which is up $0.10 from our previous view of at least $13.15 and up $0.25 from the beginning of the year.

The 12% revenue growth was driven by our transactional businesses in hardware and software. Software growth was driven by key branded middleware, which was up 21%. Our Systems revenue was up 20%, with strong performance in System z, Power and System x servers.

In Services, our total backlog increased to $144 billion, that’s up almost $15 billion from last year, with $13 billion from currency and $2 billion of constant currency performance. Services revenue was up 10%. Within this, growth markets were up 22% or 10% of constant currency.

Overall, growth market performance was strong and revenue from these countries was up 13% in constant currency, our fourth consecutive quarter of double-digit constant currency performance. In fact, we had continued momentum in all of our growth initiatives, Growth Markets, Business Analytics, Cloud and Smarter Planet.

Turning to profit, we increased operating pre-tax income by 10% and operating net income 11%. Bottom line, we delivered operating EPS of $3.09, which is up 18% year-to-year. Our strong earnings performance resulted in 3.4 billion of free cash flow in the quarter and in the last 12 months, we’ve generated $16 billion of free cash flow.

With this strong cash performance, we’ve delivered significant returns to shareholders, with almost 5 billion in share repurchase and dividends this quarter and almost 19 billion over the last year.