International Business Machines (IBM) Q2 2014 Results – Earnings Call Transcript

Source: Seeking Alpha

 

International Business Machines Corporation (NYSE:IBM)

Q2 2014 Earnings Conference Call

July 17, 2014, 04:30 PM ET

Executives

Patricia Murphy – Vice President, Investor Relations

Martin Schroeter – Senior Vice President and Chief Financial Officer, Finance and Enterprise Transformation

Analysts

Bill Shope – Goldman Sachs

Toni Sacconaghi – Sanford Bernstein

Katy Huberty – Morgan Stanley

David Grossman – Stifel Nicolaus

Ben Reitzes – Barclays

Lou Miscioscia – CLSA

Steve Milunovich – UBS

Tien-Tsin Huang – JPMorgan

Sherri Scribner – Deutsche Bank

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 – Vice President, Investor Relations

Thank you. This is Patricia Murphy, Vice President of Investor Relations for IBM. I’m here with Martin Schroeter, IBM’s Senior Vice President and CFO, Finance and Enterprise Transformation. I want to welcome you to our second quarter earnings presentation.

The prepared remarks will be available in roughly an hour, and replay of this 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 web site, or from us in Investor Relations.

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.

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

Martin Schroeter – Senior Vice President and Chief Financial Officer, Finance and Enterprise Transformation

Thank you for joining us today. Our second quarter and first half results reflect the stability of our overall business model, as we transform the company.

Looking at the dynamics of our portfolio, we’re continuing to drive double-digit growth in the parts of our business that address the emerging trends in enterprise IT. We had stability in our core franchises, where we continue to drive innovation. We’re dealing with secular shifts in parts of our hardware business and as we shift to higher value, we have the impact of a divested business.

Overall, our year-to-year revenue performance improved from last quarter at actual rates and was fairly consistent at constant currency. We expanded margins and we grew earnings per share. The profit dynamics also reflect the actions we’ve taken to transform our business. I’ll get into that shortly.

In the first quarter, you’ll remember that we announced a number of initiatives that support the shift to our strategic areas of data, cloud and systems of engagement. These included the launch of Bluemix, which is our cloud platform-as-a service for the enterprise. It included a $1.2 billion investment to globally expand SoftLayer cloud hubs, and it included a $1 billion investment to bring Watson’s cognitive capabilities to the enterprise.

In the second quarter, we made progress to implement these initiatives, including in June, Bluemix became generally available. We opened new SoftLayer data centers. We started to ship POWER8, and expanded the OpenPOWER consortium. And we completed substantially all of the divestiture of our customer care business.

More recently, we announced additional actions to continue our shift to higher value. You saw last week that we’re investing $3 billion over the next five years in research and in early-stage development to create the next generation of chip technologies. Those will fuel the systems required for cloud, big data and cognitive systems. And just a couple of days ago, IBM and Apple announced a strategic global partnership to provide a new level of business value from mobility for enterprise clients.

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The underlying theme of all of this, from the expansion of our cloud platforms and capacity to the OpenPOWER consortium, to the partnership with Apple for enterprise mobility to next generation chip technologies, is that we’re leveraging our unique strengths and innovation, and enterprise capabilities to maintain our differentiation in the emerging areas of enterprise IT. While some of these actions impact our results in the short-term, they better position our business for the long-term.

For the quarter, we delivered revenue of $24.4 billion and operating earnings per share of $4.32. Our revenue was down 2% or down 1% at constant currency, adjusting for the customer care divestiture. We improved gross margin by 10 basis points, the 22nd consecutive quarter of operating gross margin expansion.

Our pre-tax and net margins are up significantly. Last year’s profit base was lower, due to a workforce rebalancing charge of about $1 billion. We took a charge of a similar size in the first quarter of 2014, and so on a six-month basis the charges are fairly neutral to profit growth.

On the bottomline, we reported operating earnings per share of $4.32 in the second quarter, which is up 34% and we generated $3 billion of free cash flow, which is up $300 million over last year.

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