System iNetwork

July 20, 2009

IBM Beats Street, Talks Strategy, Downplays Hardware

In last week's conference call with Wall Street analysts and investors, Mark Loughridge, IBM senior vice president and chief financial officer, led with the prettiest numbers: In the second quarter of 2009, IBM delivered $2.32 of earnings per share, up 18 percent year to year. IBM generated more than $4 billion of cash from operations, ended the quarter with $12.5 billion in the bank, and returned $2.4 billion to shareholders, with $700 million in dividends and $1.7 billion of share repurchases. IBM now expects to generate at least $9.70 of earnings per share, which is up 50 cents from the company's previous estimates. "This is the result of the strategic transformation of our business," Loughridge said.

To nutshell IBM's major efforts, the company is working to provide high margin services and software through a nimble globalized workforce. "Margins are fueling our profit growth," Loughridge noted. "This quarter, our strategic outsourcing signings were up 38 percent at constant currency, and our key branded middleware revenue, now 58 percent of software, grew 5 percent at constant currency."

IBM's Transformation

Loughridge framed much of the conference call with explanations of IBM's transformation to a company with a high-value, high-margin focus.

"If you go back to the 90's, our gross margin was declining, with increasing pressure from commoditizing products. This was a massive headwind for us, which impacted our ability to reinvest in the business. Since then, we exited commoditizing businesses, including HDD’s in 2002, PCs in 2005, and printers in 2007--which represent nearly $15 billion of annual revenue. In that same time, we acquired over 100 companies for $20 billion. This has clearly accelerated our shift to higher value capabilities," he explained.

"We are investing in capabilities that will differentiate IBM in the future and accelerate the development of new market
opportunities. For example, in support of Smarter Planet solutions, 25 percent of our research projects are dedicated to these initiatives which take IT well beyond its traditional data center boundaries. This requires both unique technical capabilities and skills, in areas like healthcare, transportation, telecommunications and utility systems," Loughridge explained.

"From 2000 to 2008, the profit from software and services combined almost doubled," Loughridge noted. "In 2009, we’re continuing to drive solid profit growth in software and services. In fact, we expect both software and services PTI to grow double-digits this year."

Services and Software Segments

"Our combined services business did a tremendous job driving profitability and margin expansion this quarter. In what continues to be a challenging economic environment, total pre-tax profit was up 23 percent on revenue that was down 12 percent as reported and 4 percent at constant currency," Loughridge reported.

While IBM's software revenue was down 7 percent year to year on revenue of $5.3 billion for the quarter, the apparent dip was hardly bad. "We had terrific profit performance, with segment pre-tax income up 24 percent year to year, and pre-tax margin up 8 points to 32 percent," Loughridge said.

Meanwhile, Loughridge also reported that WebSphere products grew 8 percent; Business Process Management, Commerce, and Datapower product segments all grew double digits at constant currency; Information Management software declined 4 percent, but grew 4 percent at constant currency; Cognos, which was acquired in January of 2008, grew over 20 percent; IBM also had strong growth in its Information Integration and Master Data Management products. Lotus software declined 14 percent while Rational dipped 2 percent.

Tivoli's storage products grew 16 percent, or 25 percent at constant currency. "Driving this growth are the hot, higher value areas of virtualization, deduplication, and open disk storage, which together grew over 60 percent. We built the latter two capabilities through our Diligent and XIV acquisitions," Loughridge said.

Big Declines for Hardware

Systems & Technology revenue of $3.9 billion was down 26 percent year to year, which was 22 percent at constant currency. "We believe this performance is in line with the industry," Loughridge said, noting that IBM gained some market share over its competitors, particularly in the converged System p brand.

"We gained share in the UNIX market for the fifth consecutive quarter. Share gains have been the most pronounced in the midrange and high end of our product line, where our success in driving consolidation and virtualization has delivered proven results," Loughridge said. IBM said it displaced well over a 100 Unix competitors in the quarter and more than doubled the number of Sun takeouts from the first quarter.

Still, converged System p declined 13 percent year to year, but gross profit margin improved 2 points year to year "through solid cost management" Loughridge said.

System x revenue declined 22 percent and IBM's storage products declined 20 percent, but x gained a bit of market share and and storage held market share, respectively. System z revenue declined 39 percent year to year--but that's compared to stellar performance from 2008.

Blades were down 6 percent year to year.

Loughridge did say that IBM expects to improve revenue performance in the Systems & Technology Group starting in the third quarter--and deliver year to year profit growth in the fourth quarter.

Posted by cmaxcer at July 20, 2009 11:43 AM