International Business Machines’ (IBM) CEO Ginni Rometty on Q3 2014 Results – Earnings Call Transcript

International Business Machines Corporation (NYSE:IBM)

Q3 2014 Results Earnings Conference Call

October 20, 2014, 08:00 AM ET

Executives

Patricia Murphy – VP, IR

Martin Schroeter – SVP and CFO

Ginni Rometty – Chairman, President and CEO

Analysts

Bill Shope – Goldman Sachs

Katy Huberty – Morgan Stanley

Toni Sacconaghi – Sanford Bernstein

Ben Reitzes – Barclays

David Grossman – Stifel Nicolaus

Steve Milunovich – UBS

Jim Suva – Citi

Keith Bachman – Bank of Montreal

Sherri Scribner – Deutsche Bank

Amit Daryanani – RBC Capital Markets

Brian White – Cantor Fitzgerald

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 – VP, IR

Thank you. This is Patricia Murphy, Vice President of Investor Relations for IBM. I want to welcome you to our third quarter earnings presentation.

I’m here with Martin Schroeter, IBM’s Senior Vice President and CFO, Finance and Enterprise Transformation. Today we’re also joined by Ginni Rometty. As you know, Ginni is IBM’s Chairman, President and Chief Executive Officer.

First, Martin will go through our prepared remarks and then Ginni and Martin will take your questions. The prepared remarks will be available in roughly an hour, and a replay of the webcast will be posted by this time tomorrow.

I’ll 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.

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Our presentation also 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 of the presentation, and in the Form 8-K submitted to the SEC.

Now, I’ll turn the call over to Martin Schroeter.

Martin Schroeter – SVP and CFO

Thanks Patricia. We’ve a lot to cover today, our third performance, actions that accelerate the transformation of our business, including important announcements that impact our results and the basis of our reporting, our 2014 guidance and what it means as we move into 2015. Let me start with the top level results.

We reported revenue of $22.4 billion, which is down 4% or 2% at constant currency, excluding our customer care divestiture. We delivered operating net income of $3.7 billion and earnings per share of $3.68, all excluding the discontinued semiconductor manufacturing business. These results fell short of our expectations and I would attribute the shortfall to three primary drivers.

First, our software revenue was weaker than expected. We had some sales execution issues and in addition we’ve made it easier for our clients to manage their IBM software capacity across new and more traditional workloads as they invest in our platform for the longer term. I’ll expand on this later.

Second, we didn’t get the productivity required in our services business, impacting both our profit and margin and third, the environment including currency isn’t helping.

With a sharp movement in currency rates in September, there was some effect in the quarter and we expect it to have a larger impact going forward and for the business overall, we did see a slowdown in September, which had a particular impact on us given the skew of our transactional business.

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I’ll get into the details of the quarter shortly, but let me first describe the actions we are taking and put them into context. For some time now, we’ve been clear about our strategic direction and how we address the market shifts around data, cloud and engagement. All of this year, we’ve been launching initiatives and making significant investments to drive this shift.

We’ve been very successful, with strong revenue growth in our strategic imperatives and you’ll see in our third quarter results that the strategic imperatives again delivered double-digit revenue growth, but some of these fundamental shifts in the industry are happening faster than we planned.

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