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conference date: January 18, 2007
for quarter ending: December 31, 2007 (4th quarter)
Overview: Solid growth. Will continue to invest to grow.
Basic data:
Revenues were $26.3 billion, up 7% from Q4 2005.
Net income (from continuing operations) was $3.5 billion, up 8% from Q4 2005.
Earnings per share were $2.26, up 12% from Q4 2005. This included $0.06 due to a tax credit.
Gross profit margin was 44.6 percent .5% from year-earlier.
Cash and marketable securities ended at $10.7 billion.
Guidance:
Earnings per share growth in 2007 likely to be at trend (in Q&A, gave 10% figure).
Conference Highlights:
Very strong finish to year. $4.8 billion pre-tax income. Best software revenue growth in over 5 years. Ramping investments to drive future growth. Reduced stock-based compensation by 50% since 2004.
Integrated Security Systems (ISS) acquisition this quarter; reports in Global Technology Services segment.
By geography, the Americas Q4 revenues were $11.1 billion, up 6 percent from year-earlier. Europe/Middle East/Africa revenues were $9.3 billion, up 11 percent. Asia-Pacific revenues increased 7 percent to $4.8 billion. Japan returned to growth in the second half of the year. India and Russia both had growth over 30%.
Over 100% of net 2007 earnings were paid out to shareholders in dividends and buybacks.
Global Technology Services revenues up 7 percent to $8.6 billion. Global Business Services increased 6 percent to $4.2 billion. New services contracts totaled $17.8 billion, up 55 percent year over year, and ended year with a backlog of $11.6 billion, an increase of 89% from prior-year. Growth was fairly even across strategic outsourcing, business transformation outsourcing, integrated tech services, and maintenance.
Revenues from the Systems and Technology Group (S&TG) segment totaled $7.1 billion for the quarter, up 3 percent. Revenues from microelectronics decreased 6 percent and storage revenues increased 9 percent; believed gained market share. System i revenue dropped, but System z, p and x grew. Retail store solutions was up 25%.
Software segment revenues were $5.6 billion, an increase of 14 percent from Q4 2005. Middleware revenues, were $4.4 billion, up 18 percent versus the fourth quarter of 2005. Operating systems revenues decreased 2 percent to $642 million. Year-to-year WebSphere grew 22%, Information Management 28%, Tivoli 25%, Lotus 305, Rational 12%. FileNet and MRO software acquisitions completed.
Total expense and other income increased 11 percent to $6.9 billion. SG&A expense increased 7 percent to $5.6 billion. RD&E expense increased 9 percent to 1.6 billion. Intellectual property and development income increased to $241 million, up 6% from $228 million year-earlier. Other income contributed income of $150 million in the fourth quarter of 2006 versus income of $334 million in Q4 2005. In Q4 2005 gains on real estate transactions were unusually high, resulting in a decrease of $140 million year to year.
Tax rate was 28.0 percent (down from 30% ongoing rate). Expects 28.5% ongoing in 2007.
Expects revenue growth to benefit from currency conversions in first half of 2007.
Q4 share repurchases were $1.4 billion.
20,000 employees were added to global delivery centers in low-cost countries in 2006.
Q&A:
Global Technology Services profitability did not spike as usual in Q4? Total services margin improved sequentially and year-over-year. Very difficult compare to Q4 2005, so not really out of line. Would have been flat adjusted for acquisitions. Continues to make investments. ITS did improve.
Microelectronics problems? Smaller than usual sequential increase was after strong growth in first 3 quarters, in particular to preparing for game launches (supplies all 3 platforms). Strong growth in communications. Growth was 22% for full year.
Services 55% signing growth for quarter. Entering 2007 with strong backlog. Opportunities in pipeline indicate good first quarter 2007.
Hardware? Second half z platform showed strong results and market share gains. Storage had a lot of momentum that should keep up.
Software excluding acquisitions? 10% branded middleware organic growth.
Pension retirement assumptions? 8% base return objective. Interest rate environment has changed, especially at long end of curve. $2.4 billion pension expense in 2006, likely about $2.5 billion in 2007.
Guidance? 9% growth rate? Reasonable estimate is 10%. Apply to 6.06 per share.
Cash flow from ops was about 25%. Rate in 2007? India has strong category, outlook is to continue to pursue acquisition strategy.
Expense permormance? Expense growth of 16%. Largely driven by investments and acquisitions. Returns on investments were very good; software has good gross profit margins. Emerging countries have very attractive margins. But trying to reduce expenses that are not revenue generators.
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Disclaimer: Our analyst summaries may include both our condensations of statements made by company representatives and our own analysis. They are not covered by any warranty. We cannot guarantee anything said by company representatives is true. We try not to make errors, but it is possible. Before making or terminating an investment you should always verify any factual basis of your decision.
Copyright 2007 William P. Meyers
