Editor's Note: IBM released its first-quarter financial results this week and reported that Systems and Technology Group revenues, that includes Power Systems servers, increased by 16 percent (19 before currency adjustments) compared with last year's first quarter (though actual income was marginal). Power Systems revenue itself increased 19 percent. In fact, most sectors were up, as was net income for the company—by 10 percent—and per-share earnings—by 17 per cent. While there was a question about software pre-tax income, the company reported some truly startlingly positive numbers. For instance, mainframe revenue was up 41 percent over last year, and cloud revenues are apparently setting records with an upward trajectory so steep it's hard to chart. Nevertheless, the company's debt increased slightly over the prior year. Below is a summary of the results followed by the company's full announcement.

• Diluted EPS:
  • GAAP: $2.31, up 17 percent;
  • Operating (non-GAAP): $2.41, up 21 percent;
• Revenue: $24.6 billion, up 8 percent, up 5 percent adjusting for currency;
• Net income:
  • GAAP: $2.9 billion, up 10 percent
  • Operating (non-GAAP) $3.0 billion, up 13 percent
• Pre-tax income:
  • GAAP: $3.8 billion, up 9 percent;
  • Operating (non-GAAP): $4.0 billion, up 12 percent;
• Gross profit margin:
  • GAAP: 44.1 percent, up 0.5 points;
  • Operating (non-GAAP): 44.5 percent, up 0.8 points;
• Software revenue excluding divested PLM operations up 10 percent, 8 percent adjusting for currency; 6 percent including PLM, 4 percent adjusting for currency;
• Systems and Technology revenue up 19 percent, 16 percent adjusting for currency;
• System z mainframe revenue up 41 percent; MIPS up 34 percent;
• Services revenue up 6 percent, 3 percent adjusting for currency;
• Services backlog of $142 billion, up $8 billion;
• Growth markets revenue up 18 percent, 12 percent adjusting for currency;
• Business analytics revenue up 20 percent;
• Smarter Planet revenue up 20 percent;
• Cloud revenue 5 times first-quarter 2010 revenue;
• Full-year 2011 Operating (non-GAAP) EPS expectations raised to at least $13.15 from at least $13.00.

IBM has announced first-quarter 2011 diluted earnings of $2.31 per share, compared with diluted earnings of $1.97 per share in the first quarter of 2010, an increase of 17 percent. Operating (non-GAAP) diluted earnings were $2.41 per share, compared with operating diluted earnings of $2.00 per share in the first quarter of 2010, an increase of 21 percent.

First-quarter net income was $2.9 billion compared with $2.6 billion in the first quarter of 2010, an increase of 10 percent. Operating (non-GAAP) net income was $3.0 billion compared with $2.6 billion in the first quarter of 2010, an increase of 13 percent.

Total revenues for the first quarter of 2011 of $24.6 billion increased 8 percent (5 percent, adjusting for currency) from the first quarter of 2010.

“We delivered a strong first quarter with revenue growth across hardware, software and services and with more than 40 countries growing in double digits. We continued to see excellent momentum in our growth initiatives - smarter planet, cloud, business analytics, and growth markets - which bring together the full value of the IBM portfolio," said Samuel J. Palmisano, IBM chairman, president and chief executive officer. "We achieved broad-based margin improvement, while our cash flow and strong financial position enabled us to continue to return value to our shareholders.

"On the strength of this performance, we are raising our full-year 2011 operating earnings per share expectations to at least $13.15.”

First-Quarter GAAP–Operating (non-GAAP) Reconciliation

First-quarter operating (non-GAAP) diluted earnings exclude $0.10 per share of charges: $0.09 per share for the amortization of purchased intangible assets and other acquisition-related charges, and $0.01 per share for retirement-related charges driven by changes to plan assets and liabilities primarily related to market performance.

Full-Year 2011 Expectations

IBM raised its expectations for full-year 2011 GAAP diluted earnings per share to at least $12.73 from at least $12.56; and operating (non-GAAP) diluted earnings per share to at least $13.15 from at least $13.00. The 2011 operating (non-GAAP) earnings exclude $0.42 per share of charges for amortization of purchased intangible assets, other acquisition-related charges, and retirement-related charges driven by changes to plan assets and liabilities primarily related to market performance.

Geographic Regions

The Americas’ first-quarter revenues were $10.3 billion, an increase of 9 percent (8 percent, adjusting for currency) from the 2010 period. Revenues from Europe/Middle East/Africa were $7.8 billion, up 3 percent (2 percent, adjusting for currency). Asia-Pacific revenues increased 12 percent (4 percent, adjusting for currency) to $5.9 billion. OEM revenues were $600 million, up 13 percent compared with the 2010 first quarter.

Growth Markets

Revenues from the company’s growth markets increased 18 percent (12 percent, adjusting for currency). Revenues in the BRIC countries — Brazil, Russia, India and China — increased 26 percent (22 percent, adjusting for currency). Growth markets revenue represents 21 percent of IBM’s total geographic revenue for the first quarter.

Services

Total Global Services revenues increased 6 percent (3 percent, adjusting for currency). Global Technology Services segment revenues increased 6 percent (3 percent, adjusting for currency) to $9.9 billion. Global Business Services segment revenues were up 7 percent (3 percent, adjusting for currency) at $4.7 billion.

Global Services pre-tax income increased to $1.9 billion, up 34 percent year over year. Pre-tax income from Global Technology Services increased 29 percent and pre-tax margin increased to 12.2 percent (10 percent and 13.3 percent, respectively, when adjusted for workforce rebalancing charges in the first quarters of 2010 and 2011). Global Business Services pre-tax income increased 44 percent and pre-tax margin increased to 13.0 percent (19 percent and 14.0 percent, respectively, when adjusted for workforce rebalancing charges in the first quarters of 2010 and 2011).

The estimated services backlog at March 31 was $142 billion, up $8 billion year over year at actual rates ($1.5 billion, adjusting for currency).

Software

Revenues from the Software segment were $5.3 billion, an increase of 6 percent (4 percent, adjusting for currency), or 10 percent (8 percent, adjusting for currency) excluding the first-quarter 2010 divestiture of the Product Lifecycle Management operations (PLM), compared with the first quarter of 2010. Software pre-tax income of $1.7 billion was down 18 percent (up 9 percent when adjusted for the gain on the sale of IBM’s PLM operations in first-quarter 2010 and for workforce rebalancing charges in the first quarters of 2010 and 2011) year over year.

Revenues from IBM’s key middleware products, which include WebSphere, Information Management, Tivoli, Lotus and Rational products, were $3.3 billion, an increase of 16 percent (14 percent, adjusting for currency) versus the first quarter of 2010. Operating systems revenues of $542 million increased 9 percent (7 percent, adjusting for currency) compared with the prior-year quarter.

Revenues from the WebSphere family of software products increased 51 percent year over year. Information Management software revenues increased 13 percent. Revenues from Tivoli software increased 8 percent. Revenues from Lotus software increased 1 percent, and Rational software increased 5 percent.

Revenues from the company’s business analytics operations across services and software segments increased 20 percent.

Hardware

Revenues from the Systems and Technology segment totaled $4.0 billion for the quarter, up 19 percent (16 percent, adjusting for currency) from the first quarter of 2010. Systems and Technology pre-tax income was $132 million, an increase of $329 million.

Systems revenues increased 18 percent (16 percent, adjusting for currency). Revenues from System z mainframe server products increased 41 percent compared with the year-ago period. Total delivery of System z computing power, as measured in MIPS (millions of instructions per second), increased 34 percent. Revenues from Power Systems increased 19 percent compared with the 2010 period. Revenues from System x increased 13 percent. Revenues from System Storage increased 10 percent, and revenues from Retail Store Solutions increased 18 percent year over year. Revenues from Microelectronics OEM increased 23 percent.

Financing

Global Financing segment revenues decreased 4 percent (6 percent, adjusting for currency) in the first quarter to $516 million. Pre-tax income for the segment increased 22 percent to $519 million.

Overall Results

The company’s total gross profit margin was 44.1 percent in the 2011 first quarter compared with 43.6 percent in the 2010 first-quarter period. Total operating (non-GAAP) gross profit margin was 44.5 percent in the 2011 first quarter compared with 43.7 percent in the 2010 first-quarter period, with increases in Systems and Technology and Software.

Total expense and other income increased 9 percent to $7.0 billion compared with the prior-year period. SG&A expense of $5.8 billion increased 3 percent year over year compared with prior-year expense. RD&E expense of $1.6 billion increased 5 percent compared with the year-ago period. Intellectual property and custom development income increased to $262 million compared with $261 million a year ago. Other (income) and expense was income of $202 million compared with prior-year income of $545 million. Interest expense increased to $93 million compared with $82 million in the prior year.

Total operating (non-GAAP) expense and other income increased 8 percent to $7.0 billion compared with the prior-year period. Operating (non-GAAP) SG&A expense of $5.7 billion increased 2 percent year over year compared with prior-year expense. Operating (non-GAAP) RD&E expense of $1.6 billion increased 4 percent compared with the year-ago period.

Pre-tax income increased 9 percent to $3.8 billion, and pre-tax margin was 15.5 percent, up 0.1 points. Operating (non-GAAP) pre-tax income increased 12 percent to $4.0 billion and pre-tax margin was 16.2 percent, up 0.6 points.

IBM’s tax rate was 25.0 percent, down 1 point year over year; operating (non-GAAP) tax rate was also 25.0 percent, down 0.8 points.

Net income margin increased 0.3 points to 11.6 percent. Operating (non-GAAP) net income margin increased 0.6 points to 12.1 percent.

The weighted-average number of diluted common shares outstanding in the first-quarter 2011 was 1.24 billion compared with 1.32 billion shares in the same period of 2010. As of March 31, 2011, there were 1.21 billion basic common shares outstanding.

Debt, including Global Financing, totaled $30.3 billion, compared with $28.6 billion at year-end 2010. From a management segment view, Global Financing debt totaled $23.7 billion versus $22.8 billion at year-end 2010, resulting in a debt-to-equity ratio of 7.0 to 1. Non-global financing debt totaled $6.5 billion, an increase of $712 million since year-end 2010, resulting in a debt-to-capitalization ratio of 25.1 percent from 22.6 percent.

IBM ended the first-quarter 2011 with $13.2 billion of cash on hand and generated free cash flow of $0.8 billion, down approximately $600 million year over year primarily due to net income tax payments. The company returned $4.8 billion to shareholders through $0.8 billion in dividends and $4.0 billion of share repurchases. The balance sheet remains strong, and the company is well positioned to support the business over the long term.

The release contains the usual forward—looking cautionary statement and explanation of why the company reports non-GAAP (generally accepted accounting principles) figures along with standard GAAP results. The full release is available here.

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