01—Abstract
Summary
Summary of the 10-K filed February 26, 2008. Cited figures are marked; the original filing is the authoritative source.
IBM's 2007 Form 10-K shows a company that grew revenue 8.1% to $98.8 billiona (4.2% adjusted for currency) and expanded diluted EPS from continuing operations 18.5% to $7.18, helped by a $18.8 billion share repurchase program (including a $12.5 billion accelerated share repurchase) and higher margins.
Gross profit margin improved 0.4 points to 42.2%, led by Systems and Technology (up 2.0 points) and the Global Services segments, while Software (about 85% margin, 54% of software revenue from Key Branded Middleware) remained the largest profit contributor at roughly 40% of segment pre-tax income. The balance sheet became more leveraged. Total company debt rose to $35.3 billionb from $22.7 billion, and the debt-to-capital ratio for non-Global Financing debt reached 30.0%.
Stockholders' equity was essentially flat at $28.5 billionc because treasury stock purchases offset retained earnings growth. Operating cash flow was $16.1 billion, and free cash flow was $12.4 billion, up $1.9 billion. Management reaffirmed a 2010 EPS road map of $10 to $11 and projected a 2008 effective tax rate of about 27.5%.
Key risks include weakness in System z revenue (down 11.2%) as the mainframe cycle matured, a 3% decline in overall Systems and Technology revenue, exposure to currency and emerging-market execution (BRIC revenue up 26%), pending legal matters such as the SCO litigation and a Brazilian non-income tax dispute of about $2.1 billiond, and the higher interest expense tied to the buyback financing. The filing also discloses a $15 billion repurchase authorization approved on February 26, 2008, and the January 2008 Cognos acquisition for about $5.0 billion.
02—Key points
Key Highlights
- Revenue rose 8.1% to $98.8 billion (4.2% adjusted for currency), with growth in every geography and strong emerging-market performance (BRIC up 26.3%).
- Diluted EPS from continuing operations increased 18.5% to $7.18, aided by a 103 million share reduction in diluted weighted-average shares from buybacks.
- Share repurchases totaled $18.8 billion in 2007, including a $12.5 billion accelerated share repurchase, and a further $15 billion authorization was approved on February 26, 2008.
- Gross profit margin improved 0.4 points to 42.2%, driven by Systems and Technology (+2.0 points to 39.7%) and modest gains in Global Technology Services and Global Business Services.
- Software revenue grew 10.0% to $20.0 billion with a 85.2% margin, and Key Branded Middleware (WebSphere, Information Management, Lotus, Tivoli, Rational) reached $10.8 billion, up 15.5%.
- Total debt rose to $35.3 billion from $22.7 billion to fund the buyback, lifting interest expense 120% to $611 million; operating cash flow was $16.1 billion and free cash flow was $12.4 billion.
- Systems and Technology revenue fell 3.0% as System z dropped 11.2% late in its technology cycle, partly offset by growth in System p (+8.8%) and System x (+7.0%); the printing business was divested to Ricoh in June 2007.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2007filed February 26, 2008Financial Statements
| Revenue | $98.79B |
| Cost of Revenue | $57.06B |
| Gross Profit | $41.73B |
| R&D Expenses | $6.15B |
| SG&A Expenses | $22.06B |
| Interest Expense | $611.00M |
| Net Income | $10.42B |
| EPS (Basic) | $7.27 |
| EPS (Diluted) | $7.15 |
| Shares Outstanding (Basic) | 1.43B |
| Shares Outstanding (Diluted) | 1.46B |
05—Questions
Frequently Asked Questions
How did IBM's earnings per share change in 2007, and what drove it?
Diluted EPS from continuing operations rose 18.5% to $7.18, versus $6.06 in 2006. Net income from continuing operations grew 10.6%, and the balance came from a 6.6% decline in diluted weighted-average shares, reflecting the company's large share repurchase program.
Why did IBM's debt increase so significantly, and is it a concern?
Total company debt rose to $35.3 billion from $22.7 billion, mainly to finance the $12.5 billion accelerated share repurchase, which was funded largely through a 364-day bridge loan (about $11.5 billion originally) and later refinanced with long-term notes and commercial paper. IBM still reports A+/A1/A+ ratings and says its cash flow provides flexibility, but investors should watch the higher interest burden and the debt-to-capital ratio of 30.0% for non-Global Financing debt.
Which business segments are driving IBM's growth and profitability?
Global Services (GTS and GBS) produced combined revenue of $54.1 billion, up 12.1%, and pre-tax profit of $5.6 billion. Software was the largest profit contributor, with $6.0 billion of pre-tax income (39.6% of segment total). Systems and Technology revenue declined, but its margin rose sharply, and Global Financing returned 26.1% on equity, down from 29.5%.
What are the main risks highlighted in the filing?
The filing cites IT spending sensitivity to the economy, intense competition from larger and niche rivals, exposure to currency and emerging-market political and infrastructure risks, customer credit risk on open-account receivables, and dependence on key personnel and suppliers. Notable legal matters include the SCO v. IBM litigation, the Platform Solutions antitrust and patent suit, the Endicott groundwater contamination lawsuits, and Brazilian non-income tax claims of roughly $2.1 billion.
What is IBM's outlook for 2008 and its long-term targets?
IBM reaffirmed a 2010 target of $10 to $11 in EPS, implying a 14 to 16% compound annual growth rate from 2006. For 2008 it expects an effective tax rate of about 27.5%, pre-tax retirement-related costs of roughly $1.6 billion (a $950 million to $1 billion decrease), and continued investment in Software and emerging markets. It also completed the Cognos acquisition in January 2008 for about $5.0 billion, with Telelogic pending regulatory review.
06—Continue