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| IBM > SEC Filings for IBM > Form 10-Q on 27-Oct-2009 | All Recent SEC Filings |
27-Oct-2009
Quarterly Report
Snapshot
Yr. to Yr.
Percent/
(Dollars in millions except per share amounts) Margin
Three months ended September 30: 2009 2008 Change
Revenue $ 23,566 $ 25,302 (6.9 )%*
Gross profit margin 45.1 % 43.3 % 1.8 pts.
Total expense and other income $ 6,255 $ 7,064 (11.5 )%
Total expense and other income to revenue ratio 26.5 % 27.9 % (1.4 )pts.
Provision for income taxes $ 1,159 $ 1,071 8.2 %
Net income $ 3,214 $ 2,824 13.8 %
Net income margin 13.6 % 11.2 % 2.5 pts.
Earnings per share:
Assuming dilution $ 2.40 $ 2.04 ** 17.6 %
Basic $ 2.44 $ 2.08 ** 17.3 %
Weighted average shares outstanding:
Assuming dilution 1,338.2 1,384.1 ** (3.3 )%
Basic 1,319.9 1,359.5 ** (2.9 )%
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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 third 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 driven by continued margin expansion, market share gains in software and hardware driving improved revenue performance and a continuing strong cash position.
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 the company's fixed cost base and improved the operational balance point. The strong profit and cash base funds the investments to expand the company's base of 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. The strategic transformation of the business has allowed the company to deliver strong performance in this environment and to position the business for the future - with a better business profile and a more competitive cost structure.
In the quarter, the company delivered $2.40 in diluted earnings per share, an increase of 17.6 percent year to year. Total revenue decreased 6.9 percent as reported, 5.0 percent adjusted for currency. Revenue increased sequentially versus the second quarter and the revenue growth rate improved 1.8 points, adjusted for currency, compared to the prior quarter. Pre-tax income of $4,373 million increased 12.3 percent, with pre-tax margin increasing 3.2 points due to improvements in gross margin and expense. Net income margin improved 2.5 points versus the third 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.
Third quarter revenue growth was impacted by currency and the economic environment, but the company's ability to deliver value to customers, its significant base of recurring revenues and its ability to increase share in a competitive market, resulted in improved revenue performance compared to the second quarter. Software was led by share gains in WebSphere, Information Management, Tivoli and Rational which drove revenue growth for key branded middleware, which increased 5 percent, adjusted for currency. Share gains in hardware drove an improvement in the Systems and Technology revenue growth rate, which was 11 points better than the prior quarter, adjusted for currency.
On a segment basis, Global Technology Services revenue declined 4.4 percent (2 percent adjusted for currency), Global Business Services 11.5 percent (11 percent adjusted for currency) reflecting the challenges in the more economically-sensitive consulting business, Software 2.6 percent (essentially flat adjusted for currency), Systems and Technology 11.6 percent (11 percent adjusted for currency) and Global Financing 15.4 percent (13 percent adjusted for currency).
Geographic revenue decreased 6.9 percent (5 percent adjusted for currency) in the third quarter. Revenue growth, adjusted for currency, improved versus the second quarter in every geography: Americas + 2.5 points, EMEA + 0.5 points, and Asia Pacific + 0.2 points. Revenue from the major market countries decreased 7.0 percent (6 percent adjusted for currency), however, performance improved 2 points, adjusted for currency, compared to the second quarter. Revenue from the company's growth markets decreased 6.2 percent as reported, and decreased 1 percent adjusted for currency. Overall, the growth markets delivered 19 percent of total geographic revenue in the quarter, with growth, adjusted for currency, 5 points higher than the major markets.
The gross profit margin of 45.1 percent increased 1.8 points year to year driven by improved margins in Global Services and Software and an improved revenue mix driven by Software. Overall, Global Technology Services drove 1.0 points, Global Business Services 0.4 points and Software 0.6 points of the improvement in the consolidated gross margin, offsetting lower margins in Systems and Technology and Global Financing.
Total expense and other income decreased 11.5 percent (7 percent adjusted for currency) for the third quarter of 2009 versus the third quarter of 2008. Overall, the decrease was driven by approximately 8 points due to the company's focus on expense management and 5 points due to the effects of currency, offset by 1 point due to acquisitions.
The company's effective tax rate for the third quarter of 2009 was 26.5 percent versus 27.5 percent in the third quarter of 2008.
The company generated $5,197 million in cash flow provided by operating activities, an increase of $1,459 million, compared to the third quarter of 2008, primarily driven by increased net income ($390 million) and changes in operating assets and liabilities ($934 million). Net cash used in investing activities of $2,337 million was $841 million higher than third quarter of 2008, primarily due to increased investments in marketable securities and other investments in 2009 ($1,102 million), partially offset by decreases in acquisitions ($101 million) and net capital spending ($135 million). Net cash used in financing activities of $5,167 million was $3,286 million higher, compared to the third quarter of 2008, primarily due to an increase in net payments associated with debt ($5,007 million), partially offset by lower payments to repurchase common stock ($1,744 million).
Third-quarter 2009 Global Services signings were $11,809 million, a decrease of 6.8 percent year to year (7 percent adjusted for currency). The company signed 13 deals larger than $100 million in the third quarter of 2009. The estimated Global Services backlog, as reported, was $134 billion at September 30, 2009, up $3 billion versus the June 30, 2009 balance (down $2 billion adjusted for currency) and up $5 billion (up $1 billion adjusted for currency) versus the September 30, 2008 balance.
Yr. to Yr.
Percent/
(Dollars in millions except per share amounts) Margin
Nine months ended September 30: 2009 2008 Change
Revenue $ 68,528 $ 76,623 (10.6 )%*
Gross profit margin 44.7 % 42.7 % 2.0 pts.
Total expense and other income $ 18,882 $ 21,818 (13.5 )%
Total expense and other income to revenue ratio 27.6 % 28.5 % (0.9) pts.
Provision for income taxes $ 3,145 $ 2,999 4.9 %
Net income $ 8,612 $ 7,907 8.9 %
Net income margin 12.6 % 10.3 % 2.2 pts.
Earnings per share:
Assuming dilution $ 6.42 $ 5.65 ** 13.6 %
Basic $ 6.47 $ 5.75 ** 12.5 %
Weighted average shares outstanding:
Assuming dilution 1,341.6 1,399.2 ** (4.1 )%
Basic 1,330.1 1,376.7 ** (3.4 )%
9/30/09 12/31/08
Assets $ 103,675 $ 109,524 (5.3 )%
Liabilities $ 85,182 $ 95,939 + (11.2 )%
Equity $ 18,493 $ 13,584 + 36.1 %
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For the first nine months of 2009, total revenue decreased 10.6 percent as reported, 5.3 percent adjusted for currency, versus the prior year. Pre-tax income from continuing operations was $11,757 million, a 7.8 percent increase compared to the first nine months of 2008. Diluted earnings per share from continuing operations was $6.42, reflecting a 13.6 percent improvement year to year. The key drivers of performance in the third 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 nine months of 2009.
Revenue growth for the first nine months of 2009 was impacted by currency and the continuing weak economic environment. Global Services revenue was supported by the 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 7.9 percent (2 percent adjusted for currency), Global Business Services 12.4 percent (8 percent adjusted for currency), Software 5.4 percent (essentially flat adjusted for currency), Systems and Technology 20.6 percent (17 percent adjusted for currency) and Global Financing 11.5 percent (6 percent adjusted for currency).
Geographic revenue for the first nine months of 2009 decreased 10.3 percent (5 percent adjusted for currency) versus the same period of 2008. Revenue from the company's growth markets decreased 9.7 percent (increased 1 percent adjusted for currency) and revenue from the major markets decreased 10.4 percent (6 percent adjusted for currency).
For the first nine months of 2009, the gross profit margin of 44.7 percent increased 2.0 points versus the prior year driven by improved margins in Global Services and Software and an improved revenue mix driven by Software. Overall, Global Technology Services drove 1.0 points, Global Business Services drove 0.3 points and Software 0.7 points of improvement in the consolidated gross margin, offsetting margin declines in Systems and Technology and Global Financing.
Total expense and other income decreased 13.5 percent (6 percent adjusted for currency) for the first nine months of 2009 versus the first nine months of 2008. Overall, the decrease was driven by approximately 8 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 1 point.
The effective tax rate for the first nine months of 2009 was 26.8 percent versus 27.5 percent for the comparable period in 2008.
Total assets decreased $5,848 million (decreased $9,665 million adjusted for currency) from December 31, 2008, primarily due to lower total receivables ($4,886 million), cash and cash equivalents ($3,210 million), total deferred taxes ($638 million) and intangible assets ($443 million), partially offset by increased marketable securities ($1,814 million), prepaid pension assets ($1,111 million) and goodwill ($1,046 million). The company had $11,512 million in cash and marketable securities at September 30, 2009.
Total liabilities decreased $10,757 million (decreased $12,827 million adjusted for currency) from December 31, 2008, primarily due to lower total debt ($8,457 million), retirement and nonpension postretirement benefit obligations ($1,025 million) and accounts payable ($869 million).
Stockholders' equity of $18,493 million increased $4,909 million from December 31, 2008, primarily due to higher retained earnings ($6,459 million), equity translation adjustments ($1,678 million) and common stock ($1,353 million), partially offset by increased treasury stock ($4,240 million).
In the first nine months of 2009, the company generated $14,325 million in cash flow provided by operating activities, an increase of $2,134 million, compared to the first nine months of 2008, primarily driven by increased net income ($705 million) and changes in operating assets and liabilities ($1,911 million). Net cash used in investing activities of $4,234 million was $4,171 million lower than the first nine months 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 $13,494 million was $4,530 million higher, primarily due to an increase in net payments associated with debt ($7,629 million) and lower receipts of cash from other common stock transactions ($2,156 million), partially offset by lower payments to repurchase common stock ($5,472 million) in the first nine months of 2009 versus the first nine months of 2008.
Third Quarter and First Nine Months in Review
Results of Continuing Operations
Segment Details
The following is an analysis of the third quarter and first nine months of 2009 versus the third quarter and first nine 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
(Dollars in millions) Yr. to Yr. Adjusting
For the three months ended Percent/Margin for
September 30: 2009 2008 Change Currency
Revenue:
Global Technology Services $ 9,434 $ 9,864 (4.4 )% (2.1 )%
Gross margin 35.5 % 32.7 % 2.8 pts.
Global Business Services 4,338 4,900 (11.5 )% (10.6 )%
Gross margin 28.7 % 27.4 % 1.3 pts.
Software 5,114 5,249 (2.6 )% (0.0 )%
Gross margin 85.7 % 84.7 % 0.9 pts.
Systems and Technology 3,917 4,431 (11.6 )% (10.6 )%
Gross margin 35.6 % 36.2 % (0.6 )pts.
Global Financing 536 633 (15.4 )% (13.5 )%
Gross margin 44.4 % 49.1 % (4.7 )pts.
Other 227 224 1.1 % 3.7 %
Gross margin 8.5 % 15.7 % (7.3 )pts.
Total revenue $ 23,566 $ 25,302 (6.9 )% (5.0 )%
Gross profit $ 10,627 $ 10,959 (3.0 )%
Gross margin 45.1 % 43.3 % 1.8 pts.
Yr. to Yr.
Percent
Change
(Dollars in millions) Yr. to Yr. Adjusting
For the nine months ended Percent/Margin for
September 30: 2009 2008 Change Currency
Revenue:
Global Technology Services $ 27,296 $ 29,640 (7.9 )% (1.7 )%
Gross margin 34.7 % 31.9 % 2.9 pts.
Global Business Services 13,074 14,918 (12.4 )% (7.7 )%
Gross margin 27.5 % 26.1 % 1.4 pts.
Software 14,820 15,670 (5.4 )% 0.4 %
Gross margin 85.3 % 84.4 % 0.9 pts.
Systems and Technology 11,000 13,862 (20.6 )% (17.3 )%
Gross margin 35.7 % 37.3 % (1.7 )pts.
Global Financing 1,682 1,900 (11.5 )% (5.8 )%
Gross margin 45.8 % 51.8 % (5.9 )pts.
Other 656 633 3.5 % 11.0 %
Gross margin 35.7 % 0.6 % 35.1 pts.
Total revenue $ 68,528 $ 76,623 (10.6 )% (5.3 )%
Gross profit $ 30,640 $ 32,725 (6.4 )%
Gross margin 44.7 % 42.7 % 2.0 pts.
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The following table presents each reportable segment's external revenue as a percentage of total external segment revenue.
Three Months Ended Nine Months Ended
September 30, September 30,
2009 2008 2009 2008
Global Technology Services 40.4 % 39.3 % 40.2 % 39.0 %
Global Business Services 18.6 19.5 19.3 19.6
Total Global Services 59.0 58.9 59.5 58.6
Software 21.9 20.9 21.8 20.6
Systems and Technology 16.8 17.7 16.2 18.2
Global Financing 2.3 2.5 2.5 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 Nine Months Ended
September 30, September 30,
2009 2008 2009 2008
Global Technology Services 31.9 % 29.2 % 31.5 % 27.8 %
Global Business Services 14.3 17.8 14.2 17.0
Total Global Services 46.2 47.0 45.7 44.9
Software 40.1 37.5 39.9 37.6
Systems and Technology 4.9 7.0 4.6 7.3
Global Financing 8.8 8.6 9.8 10.2
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 $13,772 million, a decrease of 6.7 percent (5 percent adjusted for currency) in the third quarter and $40,370 million, a decrease of 9.4 percent (4 percent adjusted for currency) in the first nine months of 2009, respectively, when compared to the same periods of 2008. Services revenue performance was supported by its annuity revenue base, but also reflected the challenges in the more economically sensitive consulting business. In the third quarter, total Global Services signings of $11,809 million decreased 6.8 percent (7 percent adjusted for currency) year over year. The company signed 13 deals larger than $100 million in the third quarter. In addition, the company signed three deals in the first two days of October with a total value of approximately $1 billion. Signings in the outsourcing businesses were $6,671 million, an increase of 1.4 percent (1 percent adjusted for currency). Consulting and Systems Integration and Integrated Technology Services signings were $5,138 million, a decrease of 15.7 percent (15 percent adjusted for currency). The estimated Global Services backlog at actual currency rates was $134 billion at September 30, 2009, an increase of $3 billion (decrease of $2 billion adjusted for currency) from the June 30, 2009 level and $5 billion ($1 billion adjusted for currency) year to year. The Global Services segments drove a combined pre-tax profit of $2,131 million in the third quarter and $5,770 million in the first nine months of 2009, an improvement of 11.4 percent and 12.9 percent, respectively, versus the same periods of 2008. Pre-tax margins expanded 2.4 points to 14.9 percent in the third quarter and 2.7 points to 13.7 percent in the first nine months. The Services business is improving margin by focusing on a competitive cost structure while delivering value and quality to customers.
Yr. to Yr.
Percent
Change
Yr. to Yr. Adjusting
(Dollars in millions) Percent for
For the three months ended
September 30: 2009 2008 Change Currency
Global Services external revenue: $ 13,772 $ 14,764 (6.7 )% (4.9 )%
Global Technology Services $ 9,434 $ 9,864 (4.4 )% (2.1 )%
Strategic Outsourcing 4,896 5,084 (3.7 ) (1.7 )
Integrated Technology Services 2,204 2,329 (5.3 ) (3.5 )
Maintenance 1,765 1,815 (2.7 ) 0.2
Business Transformation
Outsourcing 569 636 (10.6 ) (6.7 )
Global Business Services $ 4,338 $ 4,900 (11.5 )% (10.6 )%
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Yr. to Yr.
Percent
Change
Yr. to Yr. Adjusting
(Dollars in millions) Percent for
For the nine months ended September 30: 2009 2008 Change Currency
Global Services external revenue: $ 40,370 $ 44,559 (9.4 )% (3.7 )%
Global Technology Services $ 27,296 $ 29,640 (7.9 )% (1.7 )%
Strategic Outsourcing 14,162 15,278 (7.3 ) (1.1 )
Integrated Technology Services 6,376 6,894 (7.5 ) (1.6 )
Maintenance 5,115 5,515 (7.3 ) (1.2 )
Business Transformation Outsourcing 1,644 1,956 (16.0 ) (8.4 )
Global Business Services $ 13,074 $ 14,918 (12.4 )% (7.7 )%
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Global Technology Services revenue decreased 4.4 percent (2 percent adjusted for currency) and 7.9 percent (2 percent adjusted for currency) in the third quarter and first nine months of 2009, respectively, versus the third quarter and first nine months periods of 2008. Total third-quarter signings in GTS decreased 10.6 percent (10 percent adjusted for currency) with outsourcing signings down 9.9 percent (9 percent adjusted for currency) and Integrated Technology Services signings down 12.2 percent (12 percent adjusted for currency).
Strategic Outsourcing (SO) revenue decreased 3.7 percent (2 percent adjusted for currency) in the third quarter and 7.3 percent (1 percent adjusted for currency) in the first nine months of 2009, respectively, versus the same periods in 2008. Revenue continues to be impacted by reduced volumes in the existing client base. SO signings in the third quarter of 2009 decreased 11.0 percent (10 percent adjusted for currency). Signings for the first nine months increased 8.0 percent (17 percent adjusted for currency) year over year and will add to the revenue base over a longer period of time.
Integrated Technology Services (ITS) revenue decreased 5.3 percent (4 percent adjusted for currency) in the third quarter and 7.5 percent (2 percent adjusted for currency) in the first nine months of 2009 when compared to the same periods . . .
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