Your Cheat Sheet to IBM’s Executive Earnings Call
On Wednesday, International Business Machines Corp (NYSE:IBM) reported its second quarter earnings and discussed the following topics in its earnings conference call. Here’s what the C-suite revealed.
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Toni Sacconaghi, Jr. – Sanford Bernstein & Co., LLC: Mark, you commented on a couple of headwinds, namely the tough comparison and currency dynamics. Absent from that was any commentary on the macroeconomic environment and I’m wondering if you can comment on that, particularly in light of Services performance, because I think when we entered 2012 you said 70% of Services revenue in 2012 will come from backlog and that 70% will be up 3%. Well your total Services business in the first half is tracking well below that. So, perhaps you can address the macroeconomic question in the context of that the Services revenue that you’re generating this year appears to be very weak.
A Closer Look: IBM Earnings Cheat Sheet>>
Mark Loughridge – SVP and CFO, Finance and Enterprise Transformation: Okay Toni, very good question. Let me start from a macro perspective for the second quarter. First of all if you look at the kind of geographic breakdown going first quarter to second quarter, Americas was up 2% in the first, went to 1% in the second quarter. Really that differential was due to the software compare that we had in the second quarter of last year. And if you look at the third quarter just based on a compare basis we’ll pick up another 2.5 points. So I feel pretty confident about that content as we go into the third. Europe was up 1% in the first quarter, relatively flat in the second quarter. We’ll talk about that a little more. In Asia we went from plus 1% in the first quarter to up 4%, so real strength in Asia. If you look at the distribution of that performance across the month, it was relatively linear. In other words it didn’t have big fluctuations across the month, but if anything it relatively strengthened as we went through the quarter. So, June was little stronger than the rest of the quarter. In some of our transactional businesses like our hardware base business in fact we noticed that against typical rates of performance had a pretty darn good last week of the quarter indicating momentum as we go into the third. So that’s the way I’d give kind of an overview. Now from a markets perspective, let’s talk about the growth markets. They continue to perform well across the board. BRIC countries were up 12%. They represent about a third of our overall growth markets business. Within that China was up a very impressive 24%, and I’d remind you, we now have opened our 68th face-to-face branch in China. We have over 100 virtual branches. (Total growth) markets outpaced the majors again by nine points this quarter, up 8% on a constant currency basis, and within that we had 32 countries up double digits. Every sector grew, every brand grew, software and services were 10%, our z business in the growth markets was up 11%, so I think this reflects really kind of broad-based strong performance in those markets. Major markets, as you would expect, little more mix. I was going to spend a little time on Europe. Within Europe, we did see growth within the U.K. and Spain, U.K. for the 11th quarter in a row, Spain the seventh quarter. Germany was flat and now this is the third quarter of either flat to modest growth out of Germany. But again Italy and France were down, so kind of mix performance within the European geography. Third, I kind of look at brand performance, so on a Software base we had strong performance in Europe and Asia and North America was really as I said earlier, kind of an issue of compares which we can talk about a little later. Hardware at this point in the cycle no real surprises and I said earlier, if anything z did a little better job as it went through the quarter. Again real strength in z, up 11% in growth markets. In Services, I would say really pretty consistent with last quarter. Now to your Services point, if you do the math we had said that opening backlog drives about 70% of revenues, so 70% of the 3% backlog run-out would be about 2%. So, if you look at GTS certainly that conformed with that relationship. In GBS we are down 1%. We did see in GBS some improvement in Japan in public sector but they were still down. Now within the GBS business, what I would point out within the organizational structure as we move resource from kind of historical big rollout complex product structures that are often times custom into our growth initiatives, you see some impact in that translation, but what we see in those growth initiatives within GBS, really strong growth performance, up double-digit across the board within GBS. And likewise within IBM, strong double-digit across the board pulling with it about 50% Software mix. Within that GBS content alone, the margins within those growth initiatives are about 3 points richer than the balance of the business, and that helped contribute to return to profit growth on the GBS in the second quarter, up 7%.
Earnings and Revenue Trajectory
Bill Shope – Goldman Sachs: Looking at the guidance, can you help us understand your thoughts on both the earnings and revenue trajectory through the third and fourth quarter? And regarding the sale of the point-of-sale business that you talked about last quarter, how should we think about the timing of that gain now and the timing of the workforce rebalancing charges that will theoretically counter that gain?
Mark Loughridge – SVP and CFO, Finance and Enterprise Transformation: Sure. Great question, Bill. So if you look at the full year, we’ve taken our guidance up to at least $15.10 and that would imply for the second half about 10% EPS growth. Now within that EPS growth, it’s reasonably distributed across both the third and the fourth quarter, if anything a little skewed to the fourth quarter with a new product announcement. Currency in the second half is going to be a headwind of about 4 to 5 points in the third quarter, 2 to 3 points in the fourth, and at spot rates that would be a headwind for us of about $2 billion in the second half compared to the $1 billion that we just had in the second quarter. On a third quarter basis, I would say that our constant currency revenue growth should be approximately equal to what we saw in the dynamics in the first half of the year with the fourth quarter really presenting the opportunity with our new announcement for additional growth. So back to your second half of your question, we regard this really as an all-in forecast. We realize that we do have some tax headwind as we entered the third and fourth quarter. The divestiture of our retail store systems business should generate a gain of about $450 million to $550 million in the second half. We do expect to close that shortly with the major countries really closing first. So, the gain will be recognized as we close those countries and get the cash, and I would expect the bulk of that to happen in the third quarter but based on country closings some may extend into the fourth. Now as we discussed a number of times in the past, when we get that cash inflow from a divestiture, we put that to good work to improve the productivity of your business and that’s why these divestitures are accretive to IBM. So consequently we will also have workforce rebalancing in the second half I expect slightly greater than the first half of 2012. Now that workforce rebalancing will be focused on our non-U.S. operations, very little really in the U.S. So all in all we feel optimistic about our hand for the second half in spite of the headwinds that we see.
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