IBM (NYSE: IBM) today announced third-quarter 2010 diluted earnings of $2.82 per share, compared with diluted earnings of $2.40 per share in the third quarter of 2009, an increase of 18 percent.
Third-quarter net income was $3.6 billion compared with $3.2 billion in the third quarter of 2009, an increase of 12 percent. Total revenues for the third quarter of 2010 of $24.3 billion increased 3 percent (4 percent, adjusting for currency) from the third quarter of 2009.
“In the third quarter we grew revenue in our hardware, software and services businesses, expanded margins and again increased earnings per share at double digits,” said Samuel J. Palmisano, IBM chairman, president and chief executive officer. “We achieved excellent performance in our growth markets unit, reflecting sustained investments through the downturn and the continued strength of the infrastructure build-out in these countries.
“Looking ahead, we are uniquely positioned in the enterprise, investing in high value segments like business analytics, advanced systems and smarter planet solutions. As a result, we are confident we can deliver strong business performance to grow profit, return value to our shareholders and to achieve full-year 2010 diluted earnings per share of at least $11.40.”
From a geographic perspective, the Americas’ third-quarter revenues were $10.2 billion, an increase of 3 percent (2 percent, adjusting for currency) from the 2009 period. Revenues from Europe/Middle East/Africa were $7.4 billion, down 6 percent (up 1 percent, adjusting for currency). Asia-Pacific revenues increased 14 percent (7 percent, adjusting for currency) to $5.9 billion. OEM revenues were $806 million, up 27 percent compared with the 2009 third quarter.
Revenues from the company’s growth markets organization increased 16 percent (13 percent, adjusting for currency) and represented 21 percent of IBM’s total geographic revenue in the quarter. Revenues in the BRIC countries – Brazil, Russia, India and China – increased 29 percent (26 percent, adjusting for currency), and 28 other growth market countries also had double-digit revenue growth, adjusting for currency. Growth markets revenues for both servers and storage increased by more than 20 percent in the quarter. IBM now has 103 sales offices in the growth markets countries after opening 40 offices in 2010.
Total Global Services revenues increased 2 percent (2 percent, adjusting for currency). Global Technology Services segment revenues increased 1 percent (1 percent, adjusting for currency) to $9.5 billion. Global Business Services segment revenues were up 5 percent (5 percent, adjusting for currency) at $4.6 billion.
Global Services pre-tax income increased to $2.2 billion, up 4 percent year over year. Pre-tax income from Global Technology Services increased 4 percent and Global Business Services increased 5 percent. Segment pre-tax margins increased to 15.5 percent and 14.6 percent, respectively.
The estimated services backlog at September 30 was $134 billion, up $5 billion quarter to quarter (down $2 billion, adjusting for currency), and flat year over year at actual rates and adjusting for currency. The backlog includes signed services contracts of $11.0 billion (down 7 percent) in the quarter, of which 10 contracts were greater than $100 million. Transactional signings were $5.4 billion, an increase of 4 percent (4 percent, adjusting for currency). Outsourcing signings were $5.7 billion, down 15 percent (14 percent, adjusting for currency). Including an agreement signed on October 8, the company would have reported outsourcing signings growth of 14 percent, adjusting for currency. This would have increased total signings reported from $11.0 billion to $12.7 billion.
Revenues from the Software segment were $5.2 billion, an increase of 1 percent (2 percent, adjusting for currency), or 4 percent (6 percent, adjusting for currency) excluding the first-quarter divestiture of the Product Lifecycle Management operations (PLM), compared with the third quarter of 2009. Software pre-tax income of $1.9 billion increased 2 percent year over year.
Revenues from IBM’s key middleware products, which include WebSphere, Information Management, Tivoli, Lotus and Rational products, were $3.1 billion, an increase of 7 percent (8 percent, adjusting for currency) versus the third quarter of 2009. Operating systems revenues of $550 million increased 6 percent (7 percent, adjusting for currency) compared with the prior-year quarter.
Revenues from the WebSphere family of software products increased 14 percent year over year. Information Management software revenues increased 5 percent. Revenues from Tivoli software increased 9 percent. Revenues from Lotus software and Rational software were flat.
Revenues from the company’s business analytics operations across services and software segments increased 14 percent.
Revenues from the Systems and Technology segment totaled $4.3 billion for the quarter, up 10 percent (11 percent, adjusting for currency) from the third quarter of 2009. Systems and Technology pre-tax income was $327 million, an increase of 46 percent.
Systems revenues increased 8 percent (9 percent, adjusting for currency). Revenues from System x increased 30 percent. Revenues from System z mainframe server products increased 15 percent compared with the year-ago period. Total delivery of System z computing power, as measured in MIPS (millions of instructions per second), increased 54 percent. Revenues from Power Systems decreased 13 percent compared with the 2009 period. Revenues from System Storage increased 7 percent, and revenues from Retail Store Solutions were flat year over year. Revenues from Microelectronics OEM increased 28 percent.
Global Financing segment revenues decreased 1 percent (1 percent, adjusting for currency) in the third quarter to $529 million. Pre-tax income for the segment increased 23 percent to $503 million.
The company’s total gross profit margin was 45.3 percent in the 2010 third quarter compared with 45.1 percent in the 2009 third-quarter period, led by improving margins in Systems and Technology and Software.
Total expense and other income increased 1 percent to $6.3 billion compared with the prior-year period. SG&A expense of $5.1 billion increased 3 percent year over year compared with prior-year expense. RD&E expense of $1.5 billion increased 1 percent compared with the year-ago period. Intellectual property and custom development income decreased to $278 million compared with $294 million a year ago. Other (income) and expense was income of $106 million compared with prior-year expense of $5 million. Interest expense increased to $95 million compared with $84 million in the prior year.
Pre-tax income increased 7 percent to $4.7 billion. Pre-tax margin was 19.3 percent, up 0.7 points.
IBM’s tax rate reflects an updated view of the full-year rate to 25 percent.
Net income margin increased 1.1 points to 14.8 percent.
The weighted-average number of diluted common shares outstanding in the third-quarter 2010 was 1.27 billion compared with 1.34 billion shares in the same period of 2009. As of September 30, 2010, there were 1.24 billion basic common shares outstanding.
Debt, including Global Financing, totaled $27.5 billion, compared with $26.1 billion at year-end 2009. From a management segment view, Global Financing debt totaled $22.0 billion versus $22.4 billion at year-end 2009, resulting in a debt-to-equity ratio of 7.1 to 1. Non-global financing debt totaled $5.5 billion, an increase of $1.7 billion since year-end 2009, resulting in a debt-to-capitalization ratio of 22.1 percent from 16.0 percent.
IBM ended the third-quarter 2010 with $11.1 billion of cash on hand and generated free cash flow of $3.2 billion, down approximately $200 million year over year. Free cash flow for the nine months of the year was $7.6 billion, down approximately $300 million. The company returned $4.5 billion to shareholders through $0.8 billion in dividends and $3.7 billion of share repurchases. The balance sheet remains strong, and the company is well positioned to support its full-year objectives.
Year-To-Date 2010 Results
Net income for the nine months ended September 30, 2010 was $9.6 billion compared with $8.6 billion in the year-ago period, an increase of 11 percent. Diluted earnings per share were $7.38 compared with $6.42 per diluted share for the 2009 period, an increase of 15 percent. Revenues for the nine-month period totaled $70.9 billion, an increase of 3 percent (2 percent, adjusting for currency) compared with $68.5 billion for the nine months of 2009.
Forward-Looking and Cautionary Statements
Except for the historical information and discussions contained herein, statements contained in this release may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based on the company’s current assumptions regarding future business and financial performance. These statements involve a number of risks, uncertainties and other factors that could cause actual results to differ materially, including the following: a downturn in economic environment and corporate IT spending budgets; the company’s failure to meet growth and productivity objectives, a failure of the company’s innovation initiatives; risks from investing in growth opportunities; failure of the company’s intellectual property portfolio to prevent competitive offerings and the failure of the company to obtain necessary licenses; breaches of data security; fluctuations in revenue and purchases, impact of local legal, economic, political and health conditions; adverse effects from environmental matters, tax matters and the company’s pension plans; ineffective internal controls; the company’s use of accounting estimates; the company’s ability to attract and retain key personnel and its reliance on critical skills; impact of relationships with critical suppliers; currency fluctuations and customer financing risks; impact of changes in market liquidity conditions and customer credit risk on receivables; reliance on third party distribution channels; the company’s ability to successfully manage acquisitions and alliances; risk factors related to IBM securities; and other risks, uncertainties and factors discussed in the company’s Form 10-Q, Form 10-K and in the company’s other filings with the U.S. Securities and Exchange Commission (SEC) or in materials incorporated therein by reference. Any forward-looking statement in this release speaks only as of the date on which it is made. The company assumes no obligation to update or revise any forward-looking statements.
Presentation of Information in this Press Release
In an effort to provide investors with additional information regarding the company’s results as determined by generally accepted accounting principles (GAAP), the company has also disclosed in this press release the following non-GAAP information which management believes provides useful information to investors:
IBM results —
- presenting non-global financing debt-to-capitalization ratio;
- adjusting for free cash flow;
- adjusting for currency (i.e., at constant currency);
- excluding divested PLM operations.
The rationale for management’s use of non-GAAP measures is included as part of the supplementary materials presented within the third-quarter earnings materials. These materials are available on the IBM investor relations Web site at www.ibm.com/investor and are being included in Attachment II (“Non-GAAP Supplementary Materials”) to the Form 8-K that includes this press release and is being submitted today to the SEC.
Conference Call and Webcast
IBM’s regular quarterly earnings conference call is scheduled to begin at 4:30 p.m. EDT, today. Investors may participate by viewing the Webcast at www.ibm.com/investor/3q10. Presentation charts will be available on the Web site shortly before the Webcast.
Financial Results Below (certain amounts may not add due to use of rounded numbers; percentages presented are calculated from the underlying whole-dollar amounts).