IBM Earnings Call Insights: Q3 Color Commentary, Growth Opportunities

On Tuesday, International Business Machines Corp (NYSE:IBM) reported its third quarter earnings and discussed the following topics in its earnings conference call. Take a look.

Q3 Color Commentary

Toni Sacconaghi, Jr. – Sanford Bernstein & Co., LLC: I was wondering, if you could provide some color commentary around the quarter. Relative to your expectations revenues were short, your tone I think sounded a bit more cautious and you made several references to the U.S. being weaker and the third month of the quarter being more challenging. So specifically on those latter two points, can you help us understand what you think happened? Is this being driven by macroeconomic issues? Are these IBM execution issues and if we roll – if we look forward, are you expecting either the execution of the macro issues to reverse or improve in the fourth quarter?

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Mark Loughridge – SVP and CFO, Finance and Enterprise Transformation: Yes. Good questions, Tony. So, if you look at the third quarter performance, we did start off the first two months to the quarter on a stronger trajectory than we saw for the full quarter as we saw a fall-off in our growth rates in the third month of the quarter. Now, within that, third month phenomena, I would point to look at it from a brand perspective that was really a fall-off that we saw in our GBS business, number one, and our software business, number two, and from a geographic perspective, it was really a fall-off that we saw in North America and our growth markets unit which we refer to as GMU. Now, elementally, as you walk down those, the software content, I would attribute to a handful of deals that fell out of the quarter. Frankly, we thought we had those, right through the end of the quarter. They rolled to the fourth quarter. They would have accounted for about 2 points improved performance, which would have been more consistent with what we saw in the first two months of the quarter and those software deals were also part of the GMU performance. So, just as a software business would have performed better in the quarter, with the roll over of those – that handful of deals so would our GMU performance. Now, as you look at our growth market performance, in addition, they were impacted really by a couple of very large countries that had disappointing performance on a year-to-year basis. So, that would be Mexico and Australia. They are both down double-digit. Our BRIC countries as a whole were up 11% and within that plus 11% positive performance very consistent what we’ve seen historically. Brazil was in fact down 3% but on the other countries Russia was up 11%, India was up 13% and China was up very strong 19%. Now let’s look at the countries in GMU, outside of the BRIC countries. Again if we exclude Australia and Mexico, where we had the double-digit decline, the balance of the countries outside of BRIC grew double-digit, in fact we had 35 countries with double-digit performance. So, I would not attribute some broader trend to either of those perspectives. In our GBS business, GBS once again produced very strong results on a solutions base, but we did have a more challenging environment for the more traditional packet solutions. The other solution content is linked to our key growth initiatives, so it’s very important that we do well there. So, now if you take that data forward in the fourth quarter, I think on the software business and the hardware business outside of the impact of the Retail Store Systems divestiture, we should be seeing mid-single digit performance from both of them and driving double-digit profitability. I think our services business will have a revenue base similar to what we saw in the third quarter, but let me add you know the services profitability that they each drove at 9% growth was right in midpoint of their model performance, and with that as well as the new announcement content that we’re getting out of our hardware business, we have new z. We have a new POWER7 plus entry in our high end of our P Series. We have got new storage (comped on). We feel quite confidence in the at least (15%) for the year.

Growth Opportunities

Benjamin Reitzes – Barclays Capital: Mark you talked a bit about what could get better in the fourth quarter in terms of revenue. I believe you said the hardware and software revenue growth rates. Can talk about what could get better in the fourth quarter and even next year in costs? You had a very larger – well put in perspective, your workforce rebalancing for us and what costs levers you have going into the fourth quarter and beyond please?

Mark Loughridge – SVP and CFO, Finance and Enterprise Transformation: Sure. I think the overall opportunity we have in costs really goes back fundamentally to the business model and how we drive that business model over longer periods of time. The workforce rebalancing that we have done this year in total that was about $800 million predominantly outside the U.S. and should have a payback of about 15 months. Now we are constantly driving workforce rebalancing to tune our population to the best growth opportunities that we have. If you look at the overall cost and spending improvement that we saw in the third quarter, the first point I would make is that, in a period of currency headwind that impact that that has in the overall translational effect of currency, that’s mitigated and partially offset obviously by the hedge. You could kind of see that in the margin performance in our business. Our gross profit margins were up 1.2 points while our PTI was up 2.5 points and that differential a large part of that is the offset of the hedge helping to offset the impact that we saw on the revenue line and this flow through to gross profit margin. The 1.2 points we add in gross profit that had a very solid mix component, about 0.4 points from mix and a very solid spend component, and I think both of those are strong ongoing plays that we should leverage as we go into the fourth quarter and 2013. That mix component is predominantly the mix that we see in the software that we’ve been driving for a decade and the spend efficiencies are part of that overall $8 billion plan that we have for 2015 roadmap. Obviously, to break that down by year, its $1.6 billion by quarter is about $400 million if we get 30% to 40% to the bottom line, that’s an advantage about $150 million. The balance, I’d remind you, that really goes to making our offerings and our products more competitive. On a price basis, it gives the ability to move spend to more aggressive growth opportunities.

A Closer Look: IBM Earnings Cheat Sheet>>