Macro Notes from the IBM Conference Call

The following are direct quotes from today’s IBM earnings conference call, which was fairly upbeat.  Note, however,  more than 50% (7 of the12 percent) of the company’s revenue growth was due to currency effects.

Key Metrics
In the second quarter, we delivered revenue growth of 12% [5% business and 7% currency effects], and operating earnings per share of $3.09, up 18% year-to-year.

Our strong earnings performance resulted in $3.4 billion of free cash flow in the quarter, and in the last 12 months we’ve generated $16 billion of free cash flow.

Guidance
With this performance, we’re increasing our full year 2011 expectation for operating earnings per share to at least $13.25, which is up $0.10 from our previous view of at least $13.15, and up $0.25 from the beginning of the year.

Geographical Performance
Based on local currency

Major markets revenue was up 3%. The U.S., our largest market, was up 6% and Canada was up 11%, driven by momentum in our server and software businesses.

Europe had a modest improvement in the year-to-year growth rate, with continued growth in U.K., France and Spain. And this quarter, Germany and Italy returned to growth.

In Japan our revenue was down 5%, consistent with the first quarter growth rate.

Growth markets continued their very strong performance, outpacing the majors by 10 points. Since we announced our growth markets unit in the beginning of 2008, the revenue growth rate has outpaced the major markets by an average of 9 points, again on a local currency basis.

We also had double-digit growth and share gains in each of the BRIC countries. The combined revenue in the BRICs was up 21%. But our success goes beyond the BRICs, we had double-digit growth in almost 40 growth market countries.

We remain confident that growth markets will approach 30% of IBM’s geographic revenue in 2015, and drive half of IBM’s revenue growth with strong margin performance.

Expenses
Our total operating expense and other income was up 20%, with about half of the growth attributed to currency, from both translation and hedging dynamics.

We hedge our major cross-border cash flows to mitigate the currency volatility in global cash planning. With the year-to-year change in currencies, hedging programs generated losses this quarter, as compared to gains last year.

Our base expense, excluding currency and acquisitions, was up 6 points.

Buybacks & Dividends
We returned almost $10 billion to shareholders. We spent $8 billion in share repurchase, where we bought back almost 50 million shares. At the end of the second quarter, we had $8.7 billion remaining in our buyback authorization.

We took our dividends up 15% in April, and through June we paid out $1.7 billion in dividends. This is the 16th consecutive year that we raised our dividend, and the eighth year in a row of double-digit increases.

Europe
I do feel that we’re in a more stable position in Europe. The growth rate in Europe went from 2%, 3%. Within that, we returned to growth in Germany. We returned to growth in Italy. We’ve got some very strong plays in Europe.

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