Consolidated fourth-quarter results
|($ and shares in millions except per share amounts)|
|For the Fourth Quarter:||2007||2006||Yr.-To-Yr.
Percent/ Margin Change
* 4.2 percent adjusted for currency.
|Revenue||$ 28,866||$ 26,257||9.9%*|
|Gross profit margin||44.9%||44.6%||0.4 pts.|
|Total expense and other income||$ 7,481||$ 6,887||8.6%|
|Total expense and other income-to-revenue ratio||25.9%||26.2%||(0.3) pts.|
|Income from continuing operations before income taxes||$ 5,489||$ 4,814||14.0%|
|Provision for income taxes||$ 1,537||$ 1,350||13.9%|
|Income from continuing operations||$ 3,951||$ 3,464||14.1%|
|Income from discontinued operations||$ 1||$ 76||NM|
|Net income||$ 3,952||$ 3,541||11.6%|
|Net income margin||13.7%||13.5%||0.2 pts.|
|Earnings per share of common stock:|
|Continuing operations||$ 2.80||$ 2.26||23.9%|
|Total||$ 2.80||$ 2.31||21.2%|
|Weighted-average shares outstanding:|
In the fourth quarter, the company increased Income from continuing operations by 14.1 percent ($487 million) to $4.0 billion versus the fourth quarter of 2006. Diluted earnings per share from continuing operations of $2.80 increased 23.9 percent versus the prior year.
The company’s performance in the fourth quarter was driven by several factors:
- The strength of the company’s global business model—led by strong performance in Asia Pacific and emerging country markets, plus continued solid performance in Europe;
- Double-digit revenue growth in the Services and Software segments; and
- Margin expansion led by the Systems and Technology and Software segments.
Total revenue in the fourth quarter of $28.9 billion increased 9.9 percent as reported (4 percent adjusted for currency). Revenue growth was led by the Global Services and Software segments and, on a geographic basis, by Asia Pacific, EMEA and the emerging countries.
The two services segments together had $14.9 billion of revenue in the fourth quarter, an increase of 16.5 percent (10 percent adjusted for currency) year to year, with double-digit revenue growth across all lines of business. Total signings for Global Services in the fourth quarter were $15.4 billion, a decrease of 13 percent versus the fourth quarter of 2006. Longer term signings decreased 25 percent compared to a very strong fourth quarter in 2006. Shorter term signings increased 8 percent. GTS revenue increased 16.4 percent (10 percent adjusted for currency), with double-digit growth across all business lines, geographies and sectors. GTS signings decreased 9 percent in the fourth quarter, with longer term signings decreasing 14 percent, partially offset by a 6 percent increase in shorter term signings. SO revenue increased 14.5 percent, driven primarily by prior-year signings, the continued sales of new business in existing accounts and good yield from current-year signings. SO signings decreased 26 percent versus fourth-quarter 2006. ITS revenue increased 11.4 percent, with growth in all geographies, led by EMEA and Asia Pacific. ITS signings increased 6 percent versus fourth-quarter 2006, led by double-digit growth in the Americas. BTO revenue increased 56.5 percent with double-digit growth in all geographies and continued strength in the Daksh business, which increased over 40 percent year to year. BTO signings increased 147 percent year to year. Maintenance revenue increased 16.2 percent and included services provided to InfoPrint Solutions, which contributed 7 points of growth in the quarter. GTS gross profit in the quarter increased 17.2 percent, with gross profit margin improving 0.2 points, primarily driven by margin expansion in SO and ITS. The GTS segment fourth-quarter pre-tax margin improved 0.9 points to 10.2 percent from fourth-quarter 2006. The margin improvement was driven primarily by an improved cost structure in SO, a mix to higher value products in ITS and good expense management. GBS revenue increased 16.8 percent (10 percent adjusted for currency) with growth in all geographies and sectors. Revenue performance was led by growth in AMS offerings and double-digit growth across all consulting service lines. GBS signings decreased 20 percent, driven by a 48-percent decline in longer term signings when compared to a very strong fourth quarter of 2006. Shorter term signings increased 9 percent to $3.9 billion for the quarter, the highest level of shorter term signings achieved in any quarter in this business. GBS gross profit increased 9.0 percent in the quarter, with a gross margin decline of 1.7 points due to higher employee bonus compensation costs. The GBS segment contributed $0.6 billion of pre-tax profit in the quarter, an increase of 9.2 percent versus the fourth quarter of 2006. Pre-tax profit margin declined 0.5 points to 11.3 percent driven primarily by the impact of higher employee bonus compensation in the quarter, partially offset by improved expense productivity.
Systems and Technology segment revenue was $6.8 billion, a decrease of 3.9 percent as reported (8 percent adjusted for currency), when compared to the fourth quarter of 2006; excluding the divested printer business, revenue was essentially flat (decreased 4 percent adjusted for currency). System z revenue decreased 15.1 percent, with revenue declines in the U.S. and EMEA, partially offset by double-digit revenue growth in Asia Pacific. This was the tenth quarter of a long and successful technology cycle for System z; MIPS shipments decreased 4 percent year to year. System i revenue increased 2.0 percent driven primarily by growth in POWER6 servers. System p revenue grew 9.5 percent, with growth in all geographies led by double-digit growth in Asia Pacific. This was the sixth consecutive quarter of revenue growth for System p, driven primarily by POWER6 servers. System x revenue increased 4.3 percent with growth in server products (6 percent) and blades (31 percent). Performance in the quarter reflected strong acceptance of the new BladeCenter-S, which was introduced at the end of the quarter, and strong demand for the new high-end Quad-Core processor servers. Systems Storage revenue increased 10.8 percent, driven by growth in tape products of 22 percent and external disk products of 7 percent. Retail Store Solutions revenue increased 5.9 percent. Microelectronics revenue declined 15.2 percent driven by a slowdown in demand for game processors. Segment gross margin at 45.7 percent, improved 3.9 points versus the fourth quarter of 2006 with margin improvement in every system brand, except System i. Systems and Technology segment pre-tax profit increased 17.8 percent to $1.4 billion. Pre-tax margin improved 3.8 points to 19.4 percent, driven primarily by operational cost management, a mix to higher end models within the brands and the value of the new POWER6 products in the market.
Software segment revenue of $6.3 billion, increased 11.6 percent (6 percent adjusted for currency), reflecting strong execution in closing transactions in the quarter and continued strong demand for the Key Branded Middleware products. Revenue growth this quarter was primarily organic, as the company wrapped around prior year acquisitions. Revenue from Key Branded Middleware increased 15.4 percent (9 percent adjusted for currency) and represented 58 percent of total software revenue. Revenue from the WebSphere Family of products grew 22.8 percent in the quarter, with strong performance tied to the industry’s adoption of services-oriented architecture. Information Management revenue increased 11.4 percent. The FileNet acquisition, now in its second year, contributed to the revenue growth. Lotus revenue increased 6.7 percent compared to a very strong fourth quarter of 2006. This is the thirteenth consecutive quarter of growth from Lotus software. Lotus Connections, which was released in June 2007, has been rapidly adopted by customers. Tivoli software revenue increased 19.0 percent with double-digit growth in Systems Management, Security and Storage products. Rational revenue increased 22.2 percent in the quarter, as the company’s largest customers embraced this integrated product set. Software gross profit increased 12.4 percent in the quarter, with margin improvement of 0.6 points. In addition to the strong revenue and gross profit performance in the fourth quarter, the Software segment delivered pre-tax profit of $2.4 billion, an increase of 20.8 percent. The pre-tax margin of 34.9 percent increased 2.6 points, reflecting the strong revenue growth with a relatively fixed cost base.
Global Financing revenue increased 7.7 percent (2 percent adjusted for currency), driven primarily by increased sales of used equipment.
From a geographic perspective, revenue increased in all geographies, led by strong performance in Asia Pacific, EMEA and the emerging countries. Americas’ revenue was $11.7 billion, an increase of 4.8 percent as reported (2 percent adjusted for currency). EMEA revenue increased 16.2 percent (6 percent adjusted for currency) to $10.8 billion. Revenue increased in most of the major countries, when adjusted for currency, led by Spain which was up 15 percent. Asia Pacific revenue increased 14.7 percent (9 percent adjusted for currency) to $5.5 billion, led by growth in the India, Greater China, Australia/New Zealand, ASEAN and Korea regions. Collectively, these regions increased 20.3 percent, adjusted for currency, versus the fourth quarter of 2006. The emerging BRIC countries of Brazil, Russia, India and China together grew 29.4 percent (18 percent adjusted for currency). In addition to the BRIC markets, there are many other nations with a similar profile that have demonstrated rapidly growing markets with strong demand for business and IT infrastructure solutions. In December 2007, the company announced a new organization and management structure aimed at continuing to capture these opportunities.
Total expense and other income increased 8.6 percent compared to the fourth quarter of 2006. Total expense and other income to revenue ratio improved 0.3 points to 25.9 percent. Selling, general and administrative expense increased 7.0 percent (3 percent adjusted for currency), primarily driven by currency, continuing investments in key markets and acquisitions and increased accounts receivable provisions. Interest expense was $214 million, an increase of $144 million versus the fourth quarter of 2006. The higher level of interest expense was primarily driven by the increased debt utilized to fund the ASR agreements in the second quarter. Other (income) and expense was $98 million of income, a reduction of $52 million (34.5 percent) versus the fourth quarter of 2006. A reduction in gains on real estate transactions and losses from foreign currency transactions were partially offset by increased interest income due to higher cash balances.
The company’s effective tax rate in the fourth-quarter 2007 was 28.0 percent, flat when compared to the fourth-quarter 2006 rate.
Share repurchases totaled approximately $0.5 billion in the fourth quarter, including $0.3 billion related to the settlement of the ASR agreements (see note M, “Stockholders equity activity”). The weighted-average number of diluted common shares outstanding in the fourth quarter of 2007 was 1,412.9 million compared with 1,532.5 million in the fourth quarter of 2006.
The company generated $5,151 million in cash flow provided by operating activities, driven primarily by Net income. Net cash from investing activities was a source of cash of $1,098 million in fourth quarter of 2007 versus a use of cash of $5,634 million in the fourth quarter of 2006, resulting primarily from the disposition of higher levels of short term marketable securities.