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| IBM > SEC Filings for IBM > Form 10-Q on 28-Jul-2009 | All Recent SEC Filings |
28-Jul-2009
Quarterly Report
Snapshot
Yr. to Yr.
Percent/
(Dollars in millions except per share amounts) Margin
Three months ended June 30: 2009 2008 Change
Revenue $ 23,250 $ 26,820 (13.3 )%*
Gross profit margin 45.5 % 43.2 % 2.3 pts.
Total expense and other income $ 6,319 $ 7,786 (18.8 )%
Total expense and other income to revenue ratio 27.2 % 29.0 % (1.8 ) pts.
Provision for income taxes $ 1,159 $ 1,049 10.5 %
Net income $ 3,103 $ 2,765 12.2 %
Net income margin 13.3 % 10.3 % 3.0 pts.
Earnings per share:
Assuming dilution $ 2.32 $ 1.97 ** 17.8 %
Basic $ 2.34 $ 2.01 ** 16.4 %
Weighted average shares outstanding:
Assuming dilution 1,336.9 1,402.1 ** (4.6 )%
Basic 1,326.1 1,376.2 ** (3.6 )%
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** Reflects the adoption of FSP EITF 03-6-1, "Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities." See Note 2, "Accounting Changes," on pages 7 to 9 for additional information.
Within the Management Discussion, selected references to "adjusted for currency" or "at constant currency" are made so that the financial results can be viewed without the impact of fluctuations in foreign currency exchange rates, thereby facilitating period-to-period comparisons of the company's business performance.
In the second quarter, in a challenging global economic environment, the company continued to deliver value to its clients, and strong financial results to its investors - with profit growth fueled by margin expansion and a continuing strong cash position. This performance is the result of the strategic transformation of the company.
Since the beginning of the decade, the company has been moving out of commoditizing businesses while investing in higher value areas - which drives a more profitable mix. In addition, a focus on the global integration of the company improves productivity and efficiency. The transformational changes to the business have reduced IBM's fixed cost base and improved the operational balance point. The strong profit and cash base funds the investments to capture opportunity in the future and return capital to shareholders. Key areas of investment include Smarter Planet solutions, business analytics and new compute models such as cloud computing.
In the quarter, the company delivered $2.32 in diluted earnings per share, an increase of 17.8 percent year to year. Total revenue decreased 13.3 percent as reported, 6.8 percent adjusted for currency. Pre-tax income of $4,262 million increased 11.8 percent, with pre-tax margin increasing 4.1 points due to improvements in gross margin and expense. Net income margin improved 3.0 points versus the second quarter of 2008, benefiting from an improved tax rate. The company's ongoing common share repurchases drove a lower share balance contributing to the improvement in diluted earnings per share.
The company's ongoing shift to higher value areas has positioned the company to better meet the needs of its clients. In the second quarter, strategic outsourcing signings increased 27.0 percent (38 percent adjusted for currency) and Key Branded Middleware revenue - increased 5 percent, adjusted for currency. The company's strategic acquisitions continue to contribute to the company's higher value capabilities. Cognos, Telelogic, ILOG, XIV and Diligent all had strong performance in the second quarter. The transformation of the company provided the largest benefit to the improved profitability margins in the quarter. The shift to higher value, the global integration of the business and ongoing productivity initiatives all contributed to significant margin improvement. Overall, the company's strategy and business model together delivered high levels of profitability in a tough economic environment.
Management Discussion - (continued)
Second quarter revenue growth was impacted by currency and the economic environment, but the company's broad business capabilities, its ability to deliver value to customers and its significant base of recurring revenues came through, with solid performance in Software led by key branded middleware. As expected in this environment, the company's transactional-based businesses were most challenged, specifically hardware and consulting, where the company was impacted by a slowdown in shorter term projects.
On a segment basis, Global Technology Services revenue declined 9.8 percent (2 percent adjusted for currency), Global Business Services 15.0 percent (9 percent adjusted for currency), Software 7.3 percent (essentially flat adjusted for currency), Systems and Technology 26.0 percent (22 percent adjusted for currency) and Global Financing 10.5 percent (4 percent adjusted for currency).
Geographic revenue decreased 13.0 percent (6 percent adjusted for currency) in the second quarter with consistent performance, adjusted for currency, across the geographies. Revenue from the company's growth markets decreased 11.1 percent as reported and increased 1 percent adjusted for currency. Revenue from the major market countries decreased 13.4 percent (8 percent adjusted for currency) as customers remain highly focused on saving costs and conserving cash.
The gross profit margin was 45.5 percent, an increase of 2.3 points, primarily due to improved margins in Global Technology Services (1.3 points of the increase), improved revenue mix and margin in Software (0.9 points of the increase) and improved margins in Global Business Services (0.3 points of the increase). These increases were partially offset by lower gross margins in Systems and Technology and Global Financing.
Total expense and other income decreased 18.8 percent (9 percent adjusted for currency) for the second quarter of 2009 versus the second quarter of 2008. Overall, the decrease was driven by approximately 10 points due to the effects of currency and 10 points due to the company's focus on expense management.
The company's effective tax rate for the second quarter of 2009 was 27.2 percent versus 27.5 percent in the second quarter of 2008.
The company generated $4,741 million in cash flow provided by operating activities, an increase of $490 million, compared to the second quarter of 2008, primarily driven by increased net income ($338 million) and changes in operating assets and liabilities ($203 million). Net cash used in investing activities of $1,849 million was $718 million higher than the second quarter of 2008, primarily due to increased investments in marketable securities and other investments in 2009 versus sales in 2008 ($1,911 million), partially offset by decreases in acquisitions ($851 million) and net capital spending ($276 million). Net cash used in financing activities of $3,743 million was $544 million lower, compared to the second quarter of 2008, primarily due to lower payments to repurchase common stock ($3,066 million), partially offset by lower receipts of cash from other common stock transactions ($1,459 million) and an increase in net payments associated with debt ($1,017 million).
Second-quarter 2009 Global Services signings were $13,988 million, a decrease of 4.8 percent year to year (3 percent increase adjusted for currency). The company signed 17 deals larger than $100 million in the second quarter of 2009. The estimated Global Services backlog, as reported, was $132 billion at June 30, 2009, up $5 billion versus the March 31, 2009 balance (unchanged adjusted for currency) and down $8 billion (up $1 billion adjusted for currency) versus the June 30, 2008 balance.
Management Discussion - (continued)
Yr. to Yr.
Percent/
(Dollars in millions except per share amounts) Margin
Six months ended June 30: 2009 2008 Change
Revenue $ 44,962 $ 51,322 (12.4 )%*
Gross profit margin 44.5 % 42.4 % 2.1 pts.
Total expense and other income $ 12,628 $ 14,754 (14.4 )%
Total expense and other income to revenue ratio 28.1 % 28.7 % (0.7 ) pts.
Provision for income taxes $ 1,986 $ 1,928 3.0 %
Net income $ 5,398 $ 5,084 6.2 %
Net income margin 12.0 % 9.9 % 2.1 pts.
Earnings per share:
Assuming dilution $ 4.02 $ 3.61 ** 11.4 %
Basic $ 4.04 $ 3.67 ** 10.1 %
Weighted average shares outstanding:
Assuming dilution 1,343.2 1,406.7 ** (4.5 )%
Basic 1,335.2 1,385.2 ** (3.6 )%
6/30/09 12/31/08
Assets $ 103,655 $ 109,524 (5.4 )%
Liabilities $ 88,182 $ 95,939 + (8.1 )%
Equity $ 15,473 $ 13,584 + 13.9 %
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** Reflects the adoption of FSP EITF 03-6-1, "Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities." See Note 2, "Accounting Changes," on pages 7 to 9 for additional information.
+ Reflects the adoption of SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements-an amendment of ARB No. 51." See Note 2, "Accounting Changes," on pages 7 to 9 for additional information.
For the first six months of 2009, in a challenging environment, total revenue decreased 12.4 percent as reported, 5.4 percent adjusted for currency, versus the prior year. Pre-tax income from continuing operations was $7,385 million, a 5.3 percent increase compared to the first half of 2008. Diluted earnings per share from continuing operations was $4.02, reflecting an 11.4 percent improvement year to year. The key drivers of performance in the second quarter - the company's ongoing transformation, shift to higher value areas and margin expansion - were the primary contributors to the strong profit improvement in the first half of 2009.
Revenue growth for the first half of 2009 was impacted by currency and the continuing economic environment. Global Services revenue was supported by the strong annuity base. The Software business continued to perform well, led by the Key Branded Middleware products and the significant base of recurring revenues. Systems and Technology performance reflects the challenges that transaction-based businesses are facing in this environment.
On a segment basis, Global Technology Services revenue declined 9.7 percent (2 percent adjusted for currency), Global Business Services 12.8 percent (6 percent adjusted for currency), Software 6.9 percent (up 1 percent adjusted for currency), Systems and Technology 24.9 percent (20 percent adjusted for currency) and Global Financing 9.5 percent (2 percent adjusted for currency).
Geographic revenue for the first six months of 2009 decreased 11.9 percent (5 percent adjusted for currency) versus the same period of 2008. Revenue from the company's growth markets decreased 11.5 percent (increased 2 percent adjusted for currency) and revenue from the major markets decreased 12.0 percent (6 percent adjusted for currency). The growth markets have delivered revenue growth, adjusted for currency, approximately 8 points higher than the major markets for the past 6 quarters.
The gross profit margin was 44.5 percent, an increase of 2.1 points, primarily due to improved margins in Global Technology Services (1.1 points of the increase), improved revenue mix and margin in Software (0.7 points of the increase) and improved margins in Global Business Services (0.3 points of the increase). These increases were partially offset by lower gross margins in Systems and Technology and Global Financing.
Management Discussion - (continued)
Total expense and other income decreased 14.4 percent (5 percent adjusted for currency) for the first six months of 2009 versus the first six months of 2008. Overall, the decrease was driven by approximately 9 points due to the effects of currency and 7 points due to the company's focus on expense management, partially offset by increased acquisition-related spending which accounted for approximately 2 points.
The effective tax rate for the first six months of 2009 was 26.9 percent versus 27.5 percent for the comparable period in 2008.
Total assets decreased $5,869 million (decreased $7,101 million adjusted for currency) from December 31, 2008, primarily due to lower total receivables ($4,684 million), cash and cash equivalents ($1,063 million), total deferred taxes ($398 million) and intangible assets ($299 million), partially offset by increased marketable securities ($682 million). The company had $12,526 million in cash and marketable securities at June 30, 2009.
Total liabilities decreased $7,758 million (decreased $8,099 million adjusted for currency) from December 31, 2008, primarily due to lower total debt ($4,553 million), accounts payable ($1,144 million), retirement and nonpension postretirement benefit obligations ($993 million) and compensation and benefits ($722 million).
Stockholders' equity of $15,473 million increased $1,889 million from December 31, 2008, primarily due to higher retained earnings ($3,975 million), equity translation adjustments ($766 million) and common stock ($645 million), partially offset by increased treasury stock ($3,508 million).
In the first half of 2009, the company generated $9,127 million in cash flow provided by operating activities, an increase of $675 million, compared to the first half of 2008, primarily driven by increased net income ($315 million) and changes in operating assets and liabilities ($977 million). Net cash used in investing activities of $1,897 million was $5,012 million lower than the first half of 2008, primarily due to the Cognos and Telelogic acquisitions in 2008 and the sale of the core logistics operations to Geodis in 2009. Net cash used in financing activities of $8,326 million was $1,243 million higher, primarily due to an increase in net payments associated with debt ($2,622 million) and lower receipts of cash from other common stock transactions ($2,182 million), partially offset by lower payments to repurchase common stock ($3,728 million) in the first half of 2009 versus the first half of 2008.
Management Discussion - (continued)
Second Quarter and First Six Months in Review
Results of Continuing Operations
Segment Details
The following is an analysis of the second quarter and first six months of 2009 versus second quarter and first six months of 2008 reportable segment external revenue and gross margin results. Segment pre-tax income includes transactions between the segments that are intended to reflect an arms-length transfer price.
Yr. to Yr.
Percent
Change
Yr. to Yr. Adjusting
(Dollars in millions) Percent/Margin for
For the three months ended June 30: 2009 2008 Change Currency
Revenue:
Global Technology Services $ 9,108 $ 10,100 (9.8 )% (2.2 )%
Gross margin 34.8 % 31.6 % 3.2 pts.
Global Business Services 4,338 5,107 (15.0 )% (9.0 )%
Gross margin 27.2 % 25.8 % 1.3 pts.
Software 5,166 5,574 (7.3 )% (0.2 )%
Gross margin 85.9 % 84.6 % 1.2 pts.
Systems and Technology 3,855 5,212 (26.0 )% (22.1 )%
Gross margin 37.1 % 38.6 % (1.5 ) pts.
Global Financing 568 634 (10.5 )% (4.0 )%
Gross margin 47.1 % 55.3 % (8.2 ) pts.
Other 215 193 11.4 % 22.1 %
Gross margin 47.4 % 5.8 % 41.7 pts.
Total revenue $ 23,250 $ 26,820 (13.3 )% (6.8 )%
Gross profit $ 10,581 $ 11,599 (8.8 )%
Gross margin 45.5 % 43.2 % 2.3 pts.
Yr. to Yr.
Percent
Change
Yr. to Yr. Adjusting
(Dollars in millions) Percent/Margin for
For the six months ended June 30: 2009 2008 Change Currency
Revenue:
Global Technology Services $ 17,862 $ 19,777 (9.7 )% (1.5 )%
Gross margin 34.3 % 31.5 % 2.9 pts.
Global Business Services 8,736 10,018 (12.8 )% (6.3 )%
Gross margin 26.8 % 25.4 % 1.4 pts.
Software 9,705 10,421 (6.9 )% 0.6 %
Gross margin 85.1 % 84.3 % 0.8 pts.
Systems and Technology 7,083 9,431 (24.9 )% (20.5 )%
Gross margin 35.7 % 37.9 % (2.2 ) pts.
Global Financing 1,146 1,266 (9.5 )% (1.9 )%
Gross margin 46.5 % 53.1 % (6.6 ) pts.
Other 429 409 4.9 % 15.0 %
Gross margin 50.1 % (7.7 )% 58.0 pts.
Total revenue $ 44,962 $ 51,322 (12.4 )% (5.4 )%
Gross profit $ 20,012 $ 21,766 (8.1 )%
Gross margin 44.5 % 42.4 % 2.1 pts.
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Management Discussion - (continued)
The following table presents each reportable segment's external revenue as
a percentage of total external segment revenue.
Three Months Ended Six Months Ended
June 30, June 30,
2009 2008 2009 2008
Global Technology Services 39.5 % 37.9 % 40.1 % 38.8 %
Global Business Services 18.8 19.2 19.6 19.7
Total Global Services 58.4 57.1 59.7 58.5
Software 22.4 20.9 21.8 20.5
Systems and Technology 16.7 19.6 15.9 18.5
Global Financing 2.5 2.4 2.6 2.5
Total 100.0 % 100.0 % 100.0 % 100.0 %
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The following table presents each reportable segment's pre-tax income as a percentage of total segment pre-tax income.
Three Months Ended Six Months Ended
June 30, June 30,
2009 2008 2009 2008
Global Technology Services 30.1 % 25.2 % 31.3 % 27.1 %
Global Business Services 13.0 16.1 14.1 16.6
Total Global Services 43.2 41.3 45.4 43.7
Software 39.7 37.8 39.8 37.7
Systems and Technology 7.1 10.1 4.5 7.5
Global Financing 10.0 10.8 10.3 11.2
Total 100.0 % 100.0 % 100.0 % 100.0 %
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Global Services
The Global Services segments, Global Technology Services (GTS) and Global Business Services (GBS) had combined revenue of $13,446 million, a decrease of 11.6 percent (4 percent adjusted for currency) in the second quarter and $26,598 million, a decrease of 10.7 percent (3 percent adjusted for currency) in the first six months of 2009, respectively, when compared to the same periods of 2008. In the second quarter, total Global Services signings of $13,988 million decreased 4.8 percent (increased 3 percent adjusted for currency) year over year. Signings in the outsourcing businesses were $7,966 million, an increase of 3.1 percent (12 percent adjusted for currency). Consulting and Systems Integration and Integrated Technology Services signings were $6,022 million, a decrease of 13.5 percent (7 percent adjusted for currency). The company signed 17 deals larger than $100 million in the second quarter. The estimated Global Services backlog at actual currency rates was $132 billion at June 30, 2009, an increase of $5 billion (unchanged adjusted for currency) from the March 31, 2009 level. The Global Services segments delivered combined pre-tax profit of $2,013 million in the second quarter and $3,639 million in the first six months of 2009, an improvement of 23.4 percent and 13.8 percent, respectively, versus the same periods of 2008. The Global Services business continued to drive increased profitability and margin expansion in a challenging economic environment as a result of the transformation that has been ongoing in both services segments.
Yr. to Yr.
Percent
Yr. to Yr. Change
(Dollars in millions) Percent Adjusting for
For the three months ended June 30: 2009 2008 Change Currency
Global Services external revenue: $ 13,466 $ 15,206 (11.6 )% (4.5 )%
Global Technology Services $ 9,108 $ 10,100 (9.8 )% (2.2 )%
Strategic Outsourcing 4,727 5,183 (8.8 ) (1.2 )
Integrated Technology Services 2,137 2,378 (10.1 ) (3.9 )
Maintenance 1,694 1,876 (9.7 ) (2.6 )
Business Transformation Outsourcing 550 666 (17.4 ) (9.3 )
Global Business Services $ 4,338 $ 5,107 (15.0 )% (9.0 )%
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Management Discussion - (continued)
Yr. to Yr.
Percent
Yr. to Yr. Change
(Dollars in millions) Percent Adjusting for
For the six months ended June 30: 2009 2008 Change Currency
Global Services external revenue: $ 26,598 $ 29,794 (10.7 )% (3.1 )%
Global Technology Services $ 17,862 $ 19,777 (9.7 )% (1.5 )%
Strategic Outsourcing 9,266 10,194 (9.1 ) (1.0 )
Integrated Technology Services 4,172 4,565 (8.6 ) (1.7 )
Maintenance 3,350 3,700 (9.5 ) (2.5 )
Business Transformation Outsourcing 1,075 1,320 (18.6 ) (9.3 )
Global Business Services $ 8,736 $ 10,018 (12.8 )% (6.3 )%
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Global Technology Services revenue decreased 9.8 percent (2 percent adjusted for currency) and 9.7 percent (2 percent adjusted for currency) in the second quarter and first six months of 2009, respectively, versus the second quarter and first half periods of 2008. Total second-quarter signings in GTS increased 5.4 percent (15 percent adjusted for currency) led by outsourcing signings growth of 13.1 percent (24 percent adjusted for currency).
Strategic Outsourcing (SO) revenue decreased 8.8 percent (1 percent adjusted for currency) in the second quarter and 9.1 percent (1 percent adjusted for currency) in the first six months of 2009, respectively, versus the same periods in 2008. Revenue in the second quarter was impacted by reduced volumes in the existing client base. SO signings in the second quarter of 2009 increased 27.0 percent (38 percent adjusted for currency), with growth in all geographies. This was the third consecutive quarter of double-digit signings growth in SO, adjusted for currency. The SO business provides innovative solutions to help clients drive efficiency and cost savings.
Integrated Technology Services (ITS) revenue decreased 10.1 percent (4 percent adjusted for currency) in the second quarter and 8.6 percent (2 percent adjusted for currency) in the first six months of 2009 when compared to the same periods in 2008. The ITS business continues to drive its product portfolio towards higher value, higher margin offerings and away from OEM content. In the first half, the ITS revenue decline was primarily driven by signings declines in the . . .
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