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Quarterly earnings
Second-Quarter Earnings Announcement
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IBM REPORTS 2006 SECOND-QUARTER RESULTS
- Diluted earnings per share of $1.30 from continuing
operations, up 14 percent as reported, or 16 percent
excluding non-recurring items from the
second-quarter 2005;
- Income from continuing operations of $2.0 billion, up
9 percent, or 11 percent excluding the non-recurring
items;
- Total revenues of $21.9 billion, down 2 percent as
reported, up 1 percent when adjusted for the impact of
the divested PC business.
ARMONK, N.Y., July 18, 2006 . . . IBM today announced second-quarter
2006 diluted earnings per common share of $1.30 from continuing operations,
compared with diluted earnings of $1.14 per share in the second quarter of
2005, a year-over-year increase of 14 percent. Second-quarter income from
continuing operations was $2.0 billion compared with $1.9 billion in the
second quarter of 2005, an increase of 9 percent.
The company posted a 16 percent increase in diluted earnings per share
year over year without the second-quarter 2005 non-recurring pretax items
of a year ago, which included incremental restructuring charges of $1.7
billion ($.72 per share), offset by a $1.1 billion ($.45 per share) gain on
the sale of the PC business, and a $775 million ($.29 per share) legal
settlement received from Microsoft. Income from continuing operations
increased 11 percent over the second quarter of 2005 without the non-recurring items of a year ago.
Total revenues for the second quarter of 2006 of $21.9 billion
decreased 2 percent as reported and adjusting for currency from the second
quarter of 2005, which includes revenue from the divested PC business.
Excluding the PC revenue, revenues increased 1 percent compared with the
second quarter of 2005.
Samuel J. Palmisano, IBM chairman and chief executive officer, said:
"IBM had another solid quarter with good earnings-per-share results. Our
performance was led by our software business, which generated $4.2 billion
of revenue this quarter with strong margins, and is a significant part of
our integrated portfolio. Our System z mainframe business returned to form
this quarter, and we continued to manage important transitions in parts of
our services business, which again improved margins. We continued to grow
revenues in many key emerging markets. Cash flow, a key strength of our
business model, drove high returns to shareholders through our stock
buyback program.
"IBM has taken many strategic actions in recent years to reposition
the company. Our focus on higher-value segments of the marketplace
continues to deliver good results to shareholders, our cash position
improved significantly year over year, and we remain committed to investing
in our business and driving business performance to generate strong returns
for investors. IBM has returned more than $5.8 billion to shareholders in
the first half of the year."
From a geographic perspective, the Americas second-quarter revenues
were $9.5 billion, an increase of 1 percent as reported (2 percent,
adjusting for currency and PCs) from the 2005 period. Revenues from
Europe/Middle East/Africa were $7.2 billion, down 4 percent (1 percent,
adjusting for currency and PCs). Asia-Pacific revenues decreased 9 percent
(3 percent, adjusting for currency and PCs) to $4.2 billion. OEM revenues
were $939 million, up 34 percent compared with the 2005 second quarter.
Revenues from Global Services, including maintenance, decreased 1
percent as reported and adjusting for currency to $11.9 billion in the
second quarter of 2006. IBM signed services contracts totaling $9.6
billion and ended the quarter with an estimated services backlog, including
Strategic Outsourcing, Business Transformation Outsourcing, Global Business
Services, Integrated Technology Services and Maintenance, of $109 billion.
Hardware revenues decreased 7 percent (8 percent, adjusting for
currency) to $5.1 billion in the second-quarter 2006 compared to $5.6
billion in the year-ago period, which includes revenue from the divested PC
business. Hardware revenues without the PC business increased 3 percent (2
percent, adjusting for currency).
Hardware revenues for the Systems and Technology Group totaled $5.0
billion for the quarter, up 3 percent. Revenues from the System z server
products increased 7 percent compared with the year-ago period. Total
delivery of System z computing power, which is measured in MIPS (millions
of instructions per second), increased 7 percent. Revenues from the System
x server products were flat compared with the year-ago period. Revenues
from the System p UNIX servers decreased 10 percent and revenues from the
System i servers decreased 7 percent. Revenues from Microelectronics
increased 45 percent and revenues from System Storage decreased 2 percent.
Revenues from Software were $4.2 billion, an increase of 5 percent as
reported and adjusting for currency compared with the second quarter of
2005. Revenues from IBM's middleware brands, which include WebSphere,
Information Management, Tivoli, Lotus and Rational products, were $3.2
billion, up 4 percent versus the second quarter of 2005. Operating systems
revenues decreased 6 percent to $558 million compared with the prior-year
quarter. Revenues from other software and services increased, led by solid
growth in the Product Lifecycle Management portfolio of products.
For the WebSphere family of software products, which facilitate
customers' ability to manage a wide variety of business processes using
open standards to interconnect applications, data and operating systems,
revenues increased 17 percent. Revenues for Information Management
software, which enables clients to leverage information on demand,
increased 6 percent. Revenues from Tivoli software, infrastructure
software that enables customers to centrally manage networks including
security and storage capability, increased 12 percent, and revenues for
Lotus software, which allows collaborating and messaging by customers in
real-time communication and knowledge management, increased 6 percent year
over year. Revenues from Rational software, integrated tools to improve
the processes of software development, increased 8 percent compared with
the year-ago quarter.
Global Financing revenues decreased 7 percent as reported and
adjusting for currency in the second quarter to $580 million.
The company's total gross profit margin was 41.2 percent in the 2006
second quarter compared with 39.4 percent in the 2005 period, which
includes the divested PC business. Excluding the PC business, the second-quarter 2005 gross profit margin was 40.6 percent.
Total expense and other income increased 1 percent to $6.1 billion
compared with the prior-year period, which includes the non-recurring
items. SG&A expense decreased 24 percent primarily due to the prior-year
incremental restructuring charges of $1.5 billion. RD&E expense increased
3 percent compared with the year-ago period. Intellectual property and
custom development income decreased to $188 million compared with $288
million a year ago. Other (income) and expense was $196 million of income
in the second quarter of 2006, versus $1.7 billion of income in the same
period last year, reflecting the $775 million benefit for the Microsoft
legal settlement and the $1.1 billion gain from the sale of the PC business
partially offset by incremental charges of $236 million relating to
restructuring.
IBM's effective tax rate in the second-quarter 2006 was 30.0 percent,
compared with 32.3 percent in the second quarter of 2005. The company's
tax rate in the second-quarter 2005 increased 2.3 points due to the effect
of the second-quarter non-recurring actions.
Share repurchases totaled approximately $2.5 billion in the second
quarter. The weighted-average number of diluted common shares outstanding
in the second-quarter 2006 was 1.56 billion compared with 1.63 billion
shares in the same period of 2005. As of June 30, 2006, there were 1.52
billion basic common shares outstanding.
IBM ended the second quarter of 2006 with $10.0 billion of cash on
hand. The balance sheet remains strong, and the company is well positioned
to take advantage of opportunities.
Debt, including Global Financing, totaled $21.8 billion, compared with
$22.6 billion at year-end 2005. From a management segment view, the non-global financing debt-to-capitalization ratio was 1.5 percent at the end of
June 30, 2006, and Global Financing debt increased $813 million from year-end 2005 to a total of $21.3 billion, resulting in a debt-to-equity ratio of 6.9 to 1.
Year-To-Date 2006 Results
Income from continuing operations for the six months ended June 30,
2006 was $3.7 billion, compared with $3.3 billion in the year-ago period,
which includes non-recurring pretax items for incremental restructuring
charges of $1.7 billion, offset by the $1.1 billion gain on the sale of the
PC business, and the $775 million legal settlement received from Microsoft.
Diluted earnings per share from continuing operations were $2.37 compared
with $1.98 per diluted share for the 2005 period. Revenues from continuing
operations for the six-month period totaled $42.5 billion, a decrease of 6
percent (4 percent, adjusting for currency) compared with $45.2 billion for
the six months of 2005, which includes PC revenues of $2.9 billion for the
first four months of 2005 only. Excluding the divested PC business,
revenues increased 1 percent (2 percent, adjusting for currency) compared
with the six-month period of 2005.
For total operations, net income for the first six months of 2006 was
$3.7 billion, or $2.37 per diluted share, compared with the six months of
2005 net income of $3.2 billion, or $1.96 per diluted share, which included
a loss from discontinued operations of $27 million.
Forward-Looking and Cautionary Statements
Except for the historical information and discussions contained
herein, statements contained in this release may constitute forward-looking
statements within the meaning of the Private Securities Litigation Reform
Act of 1995. These statements involve a number of risks, uncertainties and
other factors that could cause actual results to differ materially, as
discussed in the company's filings with the U.S. Securities and Exchange
Commission (SEC).
Presentation of Information in this Press Release
In an effort to provide investors with additional information
regarding the company's results as determined by generally accepted
accounting principles (GAAP), the company has also disclosed in this press
release the following non-GAAP information which management believes
provides useful information to investors:
IBM results:
- without non-recurring items,
- without divested PC business,
- adjusting for currency (i.e., at constant currency).
The rationale for management's use of non-GAAP measures is included as
part of the supplementary materials presented within the second-quarter
earnings materials. These materials are available on the IBM investor
relations Web site at www.ibm.com/investor and are being included in
Attachment II ("Non-GAAP Supplementary Materials") to the Form 8K that
includes this press release and is being submitted today to the SEC.
Conference Call and Webcast
IBM's regular quarterly earnings conference call is scheduled to begin
at 4:30 p.m. EDT, today. Investors may participate by viewing the Webcast
at www.ibm.com/investor/2q06. Presentation charts will be available on the
Web site prior to the Webcast.
Financial Results Attached (amounts may not total due to rounding)
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INTERNATIONAL BUSINESS MACHINES CORPORATION
COMPARATIVE FINANCIAL RESULTS
(Unaudited; Dollars in millions except per share amounts)
Three Months Six Months
Ended June 30, Ended June 30,
Percent Percent
2006 2005* Change 2006 2005* Change
------- ------- ------- ------- ------- -------
REVENUE
Global Services $11,894 $12,001 -0.9% $23,461 $23,710 -1.0%
Gross margin 27.7% 26.1% 27.2% 25.2%
Hardware 5,148 5,562 -7.4% 9,722 12,315 -21.1%
Gross margin 35.9% 33.9% 33.7% 30.4%
Software 4,241 4,056 4.5% 8,147 7,871 3.5%
Gross margin 84.2% 84.4% 84.2% 84.1%
Global Financing 580 622 -6.8% 1,164 1,202 -3.2%
Gross margin 51.1% 52.6% 52.0% 53.4%
Other 26 29 -11.0% 54 80 -31.8%
Gross margin 19.8% 25.4% -15.4% 63.8%
TOTAL REVENUE 21,890 22,270 -1.7% 42,549 45,178 -5.8%
GROSS PROFIT 9,014 8,775 2.7% 17,102 17,029 0.4%
Gross margin 41.2% 39.4% 40.2% 37.7%
EXPENSE AND OTHER INCOME
S,G&A 4,916 6,497 -24.3% 9,518 11,430 -16.7%
% of revenue 22.5% 29.2% 22.4% 25.3%
R,D&E 1,522 1,477 3.1% 2,977 2,936 1.4%
% of revenue 7.0% 6.6% 7.0% 6.5%
Intellectual property
and custom development
income (188) (288) -34.5% (418) (507) -17.6%
Other (income)
and expense (196) (1,711) -88.6% (442) (1,689) -73.8%
Interest expense 72 67 6.4% 138 116 19.0%
TOTAL EXPENSE AND
OTHER INCOME 6,125 6,042 1.4% 11,774 12,286 -4.2%
% of revenue 28.0% 27.1% 27.7% 27.2%
INCOME FROM CONTINUING
OPERATIONS BEFORE
INCOME TAXES 2,889 2,733 5.7% 5,328 4,743 12.3%
Pre-tax margin 13.2% 12.3% 12.5% 10.5%
Provision for
income taxes 867 882 -1.7% 1,598 1,485 7.7%
Effective tax
rate 30.0% 32.3% 30.0% 31.3%
INCOME FROM CONTINUING
OPERATIONS $2,022 $1,851 9.2% $3,730 $3,258 14.5%
Net margin 9.2% 8.3% 8.8% 7.2%
DISCONTINUED OPERATIONS
Loss from discontinued
operations 0 22 0 27
NET INCOME $2,022 $1,829 10.5% $3,730 $3,231 15.4%
====== ====== ====== ======
EARNINGS/(LOSS)PER SHARE
OF COMMON STOCK:
ASSUMING DILUTION
CONTINUING
OPERATIONS $1.30 $1.14 14.0% $2.37 $1.98 19.7%
DISCONTINUED
OPERATIONS (0.00) (0.01) (0.00) (0.02)
------ ------ ------ ------
TOTAL $1.30 $1.12 16.1% $2.37 $1.96 20.9%
====== ====== ====== ======
BASIC
CONTINUING
OPERATIONS $1.31 $1.15 13.9% $2.40 $2.02 18.8%
DISCONTINUED
OPERATIONS (0.00) (0.01) (0.00) (0.02)
------ ------ ------ ------
TOTAL $1.31 $1.14 14.9% $2.40 $2.00 20.0%
====== ====== ====== ======
WEIGHTED-AVERAGE NUMBER
OF COMMON SHARES
OUTSTANDING (M's)
ASSUMING DILUTION 1,560.1 1,627.9 1,573.6 1,644.2
BASIC 1,538.1 1,603.9 1,551.3 1,616.3
* Reclassified to conform with 2006 presentation; prior year
Enterprise Investments reclassified to various segments.
INTERNATIONAL BUSINESS MACHINES CORPORATION
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(Unaudited)
At At
(Dollars in millions) June 30, December 31, Percent
2006 2005 Change
-------- ----------- -------
ASSETS
Cash, cash equivalents,
and marketable securities $9,990 $13,686 -27.0%
Receivables - net, inventories,
prepaid expenses 29,601 31,975 -7.4%
Plant, rental machines,
and other property - net 13,963 13,756 1.5%
Investments and other assets 49,823 46,331 7.5%
-------- --------
TOTAL ASSETS $103,377 $105,748 -2.2%
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term debt $7,907 $7,216 9.6%
Long-term debt 13,872 15,425 -10.1%
-------- --------
Total debt 21,779 22,641 -3.8%
Accounts payable, taxes,
and accruals 26,210 27,936 -6.2%
Other liabilities 21,838 22,073 -1.1%
-------- --------
TOTAL LIABILITIES 69,828 72,650 -3.9%
STOCKHOLDERS' EQUITY 33,549 33,098 1.4%
-------- --------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $103,377 $105,748 -2.2%
======== ========
INTERNATIONAL BUSINESS MACHINES CORPORATION
SEGMENT DATA
(Unaudited)
SECOND QUARTER 2006
----------------------------------------------
Pre-tax
Income
(Loss)
From
(Dollars in millions) -------- Revenue --------- Continuing Pre-tax
External Internal Total Operations Margin
-------- -------- ------- ---------- -------
SEGMENTS
Global Technology Services $7,955 $449 $8,404 $787 9.4%
% change 1.1% -16.0% 0.0% nm
Global Business Services 3,939 351 4,290 407 9.5%
% change -4.6% -6.3% -4.7% nm
Systems and Technology
Group 5,014 271 5,286 187 3.5%
% change 3.3% 6.9% 3.5% -30.4%
Software 4,241 543 4,784 1,156 24.2%
% change 4.5% 14.8% 5.6% 27.1%
Global Financing 576 338 914 319 34.9%
% change -7.0% 22.8% 2.1% -5.7%
Personal Computing
Division 0 0 0 0 0.0%
TOTAL REPORTABLE SEGMENTS 21,725 1,952 23,677 2,856 12.1%
% change -1.6% 1.7% -1.4% 122.5%
Eliminations / Other 165 (1,952) (1,787) 32
TOTAL IBM CONSOLIDATED $21,890 $0 $21,890 $2,889 13.2%
% change -1.7% -1.7% 5.7%
SECOND QUARTER 2005*
-----------------------------------------------
Pre-tax
Income
(Loss)
From
(Dollars in millions) -------- Revenue --------- Continuing Pre-tax
External Internal Total Operations Margin
-------- -------- ------- ---------- -------
SEGMENTS
Global Technology Services $7,872 $535 $8,407 ($16) -0.2%
Global Business Services 4,129 374 4,503 (68) -1.5%
Systems and Technology
Group 4,855 254 5,109 269 5.3%
Software 4,056 474 4,530 909 20.1%
Global Financing 620 275 895 338 37.8%
Personal Computing
Division 557 7 564 (149) -26.4%
TOTAL REPORTABLE SEGMENTS 22,089 1,919 24,008 1,283 5.3%
Eliminations / Other 182 (1,919) (1,737) 1,449
TOTAL IBM CONSOLIDATED $22,270 $0 $22,270 $2,733 12.3%
nm - not meaningful
* The company made changes to its management system effective as of the
first quarter of 2006, including the separation of the Global Services
segment into two new reportable segments: Global Technology Services and
Global Business Services, as well as the reclassification of Enterprise
Investments to other reportable segments.
INTERNATIONAL BUSINESS MACHINES CORPORATION
SEGMENT DATA
(Unaudited)
SIX MONTHS 2006
----------------------------------------------
Pre-tax
Income
(Loss)
From
(Dollars in millions) -------- Revenue --------- Continuing Pre-tax
External Internal Total Operations Margin
-------- -------- ------- ---------- -------
SEGMENTS
Global Technology Services $15,674 $900 $16,575 $1,631 9.8%
% change -0.1% -18.8% -1.4% 153.2%
Global Business Services 7,787 687 8,474 763 9.0%
% change -2.8% -1.5% -2.7% nm
Systems and Technology
Group 9,433 552 9,985 169 1.7%
% change 3.2% 11.4% 3.6% -45.3%
Software 8,147 1,057 9,205 2,177 23.6%
% change 3.5% 12.9% 4.5% 27.0%
Global Financing 1,158 702 1,860 733 39.4%
% change -3.4% -3.0% -3.3% 0.5%
Personal Computing
Division 0 0 0 0 0.0%
TOTAL REPORTABLE SEGMENTS 42,200 3,898 46,098 5,473 11.9%
% change -5.8% -2.4% -5.5% 64.7%
Eliminations / Other 349 (3,898) (3,549) (145)
TOTAL IBM CONSOLIDATED $42,549 $0 $42,549 $5,328 12.5%
% change -5.8% -5.8% 12.3%
SIX MONTHS 2005*
----------------------------------------------
Pre-tax
Income
(Loss)
From
(Dollars in millions) -------- Revenue --------- Continuing Pre-tax
External Internal Total Operations Margin
-------- -------- ------- ---------- -------
SEGMENTS
Global Technology Services $15,694 $1,109 $16,803 $644 3.8%
Global Business Services 8,016 697 8,713 92 1.1%
Systems and Technology
Group 9,144 495 9,639 309 3.2%
Software 7,871 937 8,807 1,714 19.5%
Global Financing 1,199 724 1,923 729 37.9%
Personal Computing
Division 2,876 33 2,909 (165) -5.7%
TOTAL REPORTABLE SEGMENTS 44,799 3,995 48,794 3,323 6.8%
Eliminations / Other 379 (3,995) (3,616) 1,419
TOTAL IBM CONSOLIDATED $45,178 $0 $45,178 $4,743 10.5%
nm - not meaningful
* The company made changes to its management system effective as of the
first quarter of 2006, including the separation of the Global Services
segment into two new reportable segments: Global Technology Services and
Global Business Services, as well as the reclassification of Enterprise
Investments to other reportable segments.
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