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conference date: April 17, 2007 @ 1:30 PM PT
for quarter ending: March 31, 2007 (1st quarter)
Overview: Another solid quarter, with improving margins, but weakness in U.S. market.
Basic data:
Revenues of $22.0 billion were up 7% from Q1 2006.
Net income from continuing operations was $1.8 billion, up 8% from $1.7 billion in Q1 2006.
EPS of $1.21, up 12% from Q1 2006.
Csh and equivalents ended at $10.8 billion.
Guidance:
Expect continued EPS growth in 10% to 12% annual target range.
Conference Highlights:
Strong quarter in Asia offset a weak year in North America. Strong growth in Latin America. Slowdown in U.S. was most notable for large enterprises. Business in Japan continued to recover and was up 3% in quarter. India and China grew very fast, but are only a small part of revenue currently. Germany also was particularly strong.
Most revenue figures would have been less if not for currency adjustments, which accounted for 3% of total revenues.
By geography: Americas $9.1 billion, up 1% from year-earlier; Europe/Middle East/Africa $7.6 billion, up 13%; Asia-Pacific $4.5 billion up 10%.
OEM revenues were $828 million, down 5%. Global Business Services revenues were $4.2 billion, up 9%; profit margin increased 2% from prior year. Global Technology Services were $8.3 billion, up 7%. Systems and Technology (S&T) revenues were $4.5 billion, up 2%. Software segment revenues were $4.3 billlion, up 9%. Global Financing revenues were $614 million, up 6%.
Gross profit margin was 40.2%, up from 39.1% year-earlier.
Total expense increased 11% to $6.3 billion. Effective tax rate was 28.5%.
Shares repurchased were $3.4 billion. Dividends were $0.5 billion. Shares outstanding ended at 1.48 billion.
Debt totaled $23.9 billion, up from $22.7 billion at the end of 2006.
Investments and other assets (excluding cash and equivalents) ended at $44.76 billion.
Made good progress integrating businesses from last year, but they are not accretive yet while already adding to expense growth.
$175 million of stock-based compensation. $650 million expenses from retirement-related plans.
Virtualization is causing consolidation of servers, so unit shipments in some lines are declining (but not revenue). External disk sales also declined year to year. Tape business was flat.
WebSphere grew 14%; information management 20%; Tivoli 18%; Lotus 75; rational 15%; middleware 10%. But Operating Systems (OS) was flat year-over-year.
Q&A:
Americas weakness IBM or market? Did see weakness in US mainly at end of quarter in enterprise space. Expects improved second quarter. Believes in Asia is a combination of robust local economies and good IBM execution.
Pipeline for US? Had good January and February, it was March that was weak. Some deals rolled into Q2. Pipeline is strong in US.
Asia-Pacific and Europe strength looks like it will continue into Q2.
Services margin in future? Made some investments in productivity in Q1, working on improving cost structure, so should be back in normal range by Q3.
Hardware/UNIX business trends? Did have good performance with Z and P servers (high-end). Power 6 should come in second half of 2007. System storage could have done a better job. Microelectronics is now keyed to game business and is improving margins.
Pension impacts? Have been negative, but should be positive going into 2008. But very dependent on interest rates.
Industrial, financial and communication sectors were laggers in the U.S.
Software gross margin down year-over-year? Was .6% decline and due to acquisition costs.
Head count rebalancing? In Q2 will continue restructuring, but year-to-year impact will be small. Should improve Global Transaction Services margins.
Blade servers? Volumes up 12%. Believes held market share.
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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
