International Business Machines Corporation
Q4 2010 Earnings Call Transcript

Published: 19 Jan 2011

[Operator:]

Welcome, and thank you for standing by. [Operator Instructions] Now I will turn the meeting over to Ms. Patricia Murphy, Vice President of Investor Relations. Ma'am, you may begin.

[Patricia Murphy:]

Thank you. This is Patricia Murphy, Vice President of Investor Relations for IBM. I'm here with Mark Loughridge, IBM's Senior Vice President and CFO, Finance and Enterprise Transformation. Thank you for joining our fourth quarter earnings presentation. The prepared remarks will be available in roughly an hour, and a replay of this webcast will be posted to our Investor Relations website by this time tomorrow. Our presentation includes certain non-GAAP financial measures in an effort to provide additional information to investors. All non-GAAP measures have been reconciled to their related GAAP measures in accordance with the SEC rules. You will find reconciliation charts at the end and in the Form 8-K submitted to the SEC. Let me remind you that certain comments made in this presentation may be characterized as forward looking under the Private Securities Litigation Reform Act of 1995. Those statements involve a number of factors that could cause actual results to differ materially. Additional information concerning these factors is contained in the company’s filings with the SEC. Copies are available from the SEC, from the IBM website or from us in Investor Relations. Now I'll turn the call over to Mark Loughridge.

[Mark Loughridge:]

Thanks for joining us today. We just completed a great quarter, with 7% revenue growth, both as reported and at constant currency, expansion of gross pre-tax and net margins and earnings per share of $4.18, up 16% year-to-year. This represents our 32nd consecutive quarter of earnings per share growth, the only Dow component with that record. And we generated $8.7 billion of free cash flow in the quarter, up $1.5 billion year-to-year. Our revenue growth of 7% was the best constant-currency revenue growth in almost a decade, driven by Hardware and Software. Systems and Technology was up 22% at constant currency, with growth in every platform and particularly strong performance in our System z mainframe. Our Softer revenue was up 12% at constant currency without the divested PLM operations. And as I said back in October, our total services revenue growth rate was in line with the third quarter. Our total services backlog ended the year at $142 billion. At constant currency, that's up $4 billion year-to-year and up $7 billion since September. From a geographic perspective, our major market revenue growth was 5% at constant currency, led by the U.S., France and Italy. Our growth markets revenue was up 13% at constant currency. Business Analytics, one of our key growth initiatives, was up 19%. Along with strong revenue growth, we had great profit and margin performance while continuing a high level of investment. You see this in our financial summary. We expanded gross margin by 8/10, with increases in Systems and Technology and Software. Our expense was up 7% year-to-year, in line with the revenue growth. The increase was driven by acquisitions over the last 12 months and higher expenses associated with our strong revenue performance, as well as investments in capacity for ongoing growth. We increased pre-tax income by 9%, and pre-tax margin was up over 50 basis points to 24%. Our net income was also up 9%, and net margin expanded to over 18%. Finally, our ongoing share repurchase activity drove a 6% reduction in our share count. When you put this all together, we delivered EPS of $4.18, which is up 16% year-to-year. For the full year, our EPS was $11.52, up 15%, making this our eighth consecutive year of double-digit EPS growth. Our strong earnings performance drove $16 billion of free cash flow, up $1.2 billion year-to-year. And consequently, we're ending the year with a very strong balance sheet, including $11.7 billion of cash, most of which is in the U.S. I want to put this performance in the context of our 2010 roadmap. I'll then take you through the details of our fourth quarter results and wrap up with our 2015 roadmap. Early in 2007, we established our earnings per share roadmap to 2010. This is a chart I showed at our Investor Meeting in May of the 2007, when we introduced the roadmap. In that meeting, we presented an EPS objective of $10 to $11. In addition to the EPS target, we provided an analysis of the key factors driving earnings growth from 2006 to 2010. Now at the end of the roadmap period, we've delivered $11.52 of earnings per share, well above the high end of the range of $10 to $11. Let me go through the major elements. With the pressure on revenue given the recession, we relied on other elements of our model to achieve the 2010 objective. We worked on our cost and expense structure, continuing to globalize our business. We continued to improve our mix of business, and we generated a lot of cash, which allowed us to acquire key capabilities and to return significant value to shareholders. So we delivered the results with margin expansion, acquisitions and share repurchase. And we said at the time that the improvements in pension would be what it would be due to the variability of market returns and discount rates. So we were able not only to achieve but to exceed the roadmap objective due to the resilience of our business model. Looking at our progress by year, we've had consistently strong performance in EPS, with double-digit growth every year. With 2010 EPS of $11.52, we beat the low end of the target by $1.52 and the high end by $0.52, which is even more impressive when you consider we had to deal with the severe recession. In fact, IBM performed better than others over the last few years, and this resulted in superior returns to investors over the roadmap period. IBM's business results since 2006 significantly outperformed those of the S&P 500. If you compare our EPS growth to the S&P, you can see that IBM's growth rate is 17%, while the earnings of the S&P was flat. And when you look at total return on the stock, which includes share price plus dividends, we cumulatively returned 62% or $47 billion of shareholder value since the end of 2006, while an investment in the S&P resulted in a modest decline. IBM's performance is the result of a transformation we started at the beginning of this decade. We've been shifting our business to higher value areas, improving productivity and investing to drive future growth. The changes to our business are pretty dramatic. I'll give you a couple of examples. To capture the opportunity in emerging markets, we created a dedicated management system and have been investing to drive market expansion and infrastructure development. Since 2000, we've added $10 billion in annual revenue from our growth markets. And with these markets consistently outpacing the more established major markets, the revenue contribution from the growth markets has increased significantly to 21% in 2010. Across all of IBM, we have been shifting to higher value areas while divesting commoditizing businesses. These actions have contributed to a significant change in our mix of business. In 2000, Services segment's PTI was $4.5 billion, and in 2010, it's over $8 billion. Our Software profit growth is even more impressive. In 2000, Software segment PTI was $2.8 billion, and in 2010, it's over $9 billion. That's more than tripled, and Software now contributes 44% of our segment profit, up from 25% in 2000. When you look at IBM's financial results since 2000, we've added $10 billion of pre-tax income, nearly tripled EPS and generated $109 billion of free cash flow over the period. Our strong profit and cash generation has allowed us to invest in the business while delivering significant shareholder returns. Over the last 10 years, we've invested almost $60 billion in R&D, as well as $32 billion of gross spend to acquire 116 companies, adding to our capabilities and high-value areas like Business Analytics and Smarter Planet. At the same time, we've returned $107 billion to shareholders, almost $90 billion through share repurchases, and we've increased our dividends fivefold since 2000. 2010 marks the end of a very successful decade. The changes we've made over the last 10 years have strengthened our business and positioned us well to deliver over the next five years. Now let me get into the fourth quarter details, starting with the revenue by geography. With 7% revenue growth, we had strong performance in major markets and growth markets. I'll focus the geo comments on constant currency. Major markets revenue was up 5%, driven by the U.S. and Southwest Europe. The U.S., our largest market, was up 10%. This is the strongest year-to-year growth in 11 years, with improvements across our businesses. Europe's performance was led by double-digit growth in France and solid performance in Italy. As I mentioned in the opening, our growth markets had terrific performance, up 13%. For the full year, the growth markets were up 11% and outpaced the major markets by 10 points, faster than we saw in both 2008 and 2009. The combined revenue in the BRICs was up 17%, with growth in each of the four countries, in particular, the strong growth in China, which was up 25% and Russia, up 46%. Our growth markets performance was broad based, with double-digit growth in 50 growth market countries, up from 32 last quarter. We picked up share in Hardware and Software and gained share in growth markets overall. Turning to revenue by segment. As expected, the total Services growth rate was consistent with the third quarter. So the improvement in our revenue growth was driven by the Hardware and Software transactional businesses. Systems and Technology had fantastic performance, with 21% growth. We had growth in every platform, but the most impressive growth was in our System z mainframes, which were up almost 70%. Our Software growth was also very strong, up 11%, excluding the divested PLM operations, a view that best represents our ongoing business. Software growth continues to be led by key areas like Business Commerce, Systems Management and Business Analytics. I'll get into more detail when we discuss the segments. Our total expense and other income was up 7%, in line with our revenue growth. Growth in acquisitions expense contributed four points of the increase. Base expense, excluding currency and acquisitions, was up five points, driven by a higher level of expense to drive this quarter's strong revenue performance and investment in capacity to support future growth. Now I'll comment on a couple of items that had larger year-to-year impacts to our profit. Our workforce or balancing charges were better by about $60 million year-to-year. In the first quarter of 2011, we expect a gain on asset sale, which will be largely offset by workforce rebalancing predominantly in Europe, but we expect restructuring charges to be down year-to-year. And second, with the year-to-year change in currencies, our hedge of cash flow program generated a loss of about $40 million in the quarter in costs and expense as compared to last year's loss of over $250 million. We estimate that the total help to the bottom line from currency between translation and hedging is about $0.06 year-to-year in the quarter, but a year-to-year hurt to the full year EPS of about $0.11. So now let's turn to our segments. The two Services segments delivered $14.9 billion in revenue, up 2%. Global Business Services grew 4%, and Global Technology Services was up 1%. Total backlog was $142 billion. At constant currency, this is up $4 billion year-to-year and $7 billion quarter-to-quarter. Backlog for outsourcing businesses, which is the primary driver of Outsourcing revenue, was $97 billion, up $1 billion year-to-year and $5 billion quarter-to-quarter, excluding currency. Total signings were $22.1 billion, up 18%, with transactional signings of $8 billion, up 8% and outsourcing signings of $14 billion, up 24%. This quarter, we signed 19 deals over $100 million. Now let's move on to the two segments. In Global Technology Services, revenue was $10.2 billion. GTS outsourcing revenue was up 1%. Revenue was driven primarily from existing backlog. Though this quarter, we had an increase in revenue from our base accounts, which was the first quarter of base growth since the fourth quarter of 2008. We see customers starting to spend more in their base business as we exit the recession. The increase in Outsourcing backlog was due to the significant demand for our offerings in the growth markets as we help our clients build out their IT infrastructures. Integrated Technology Services revenue growth improved from previous quarters as we continue to have good performance in the growth markets. Global Technology Services pre-tax income was up 6%, and pre-tax margin expanded to 15.8%. Turning to Global Business Services. Revenue was up 4% to $4.8 billion. We delivered growth in outsourcing and in our transactional businesses, both Consulting and systems integration. We gained share for total GBS, with gains in Consulting and sustained share in Application Management Services. From a geographic perspective, our best performance was in North America, which was up 11% at constant currency. From a sector perspective, growth was led by distribution, Financial Services, industrial and General Business. And we continued to have good performance on our growth initiatives in GBS, with Business Analytics revenue up over 40%. We've now added over 4,000 consultants in 2010 and now have over 7,800 dedicated consultants on our Business Analytics practice. Global Business Services pre-tax profit margin was 15% as we continued to invest in globally integrated capabilities and skills to support growth initiatives. Before moving from Services, let me spend a minute on the drivers of revenue in our Services business. First, I'll focus the discussion on the outsourcing businesses, which are just under half of Services revenue and includes Strategic Outsourcing, Business Transformation Outsourcing and Application Outsourcing. Then I'll move on to the transactional businesses. We had a great quarter in Outsourcing signings, up 24%. On a dollar basis, that's double our third quarter signings. So very strong performance, but also a good example of signings volatility or unevenness by quarter. We've included a chart that shows Outsourcing revenue and signings growth for the last three years. As you can see, Outsourcing signings are very volatile and certainly not a good predictor of revenue. This is due to the many factors that impact how signings ultimately translate to revenue, such as duration, start date, new versus extensions. On the bottom of the chart, you can see Outsourcing backlog over the same period. This backlog has been very stable, with characteristics more similar to revenue. It's primarily in the composition of contracts within the backlog that drive revenue growth. To better understand that composition and the impact on revenue over the next year, we've taken a look at how that backlog runs out over time. The biggest driver of next year's Outsourcing revenue is, in fact, the backlog that we entered the year with. In the next chart, you see that a high percentage of 2010 Outsourcing revenue came from the backlog that we started the year with. Most of the remaining revenue came from new business we sold into our existing accounts and a much smaller portion from new client signings. Although these factors can change year-to-year, the general characteristics are consistent over time. Now if you look at our Outsourcing backlog at the end of 2010, the revenue that we expect to come from backlog in 2011 is, in fact, up 3% year-to-year. So we have very good visibility into a large component of next year's performance. Now we turn to the transactional businesses, which are just over 1/3 of services revenue and include Integrated Technology Services and Consulting and systems integration. As you can see in the chart, when you look at the combined transactional businesses, the revenue growth and signings growth are very similar within a quarter. To help investors better understand the Services revenue drivers, our plan is to import the outsourcing backlog as a discrete metric each quarter and then next year, update the Outsourcing backlog runout. And we will begin reporting the transactional and outsourcing revenue components of Global Business Services, which gives you better insight into revenue. Software had a very strong quarter. Revenue of $7 billion was up 7% or 8% at constant currency. Adjusting for the divestiture of PLM, which is a more appropriate view of our ongoing business, our revenue is up 11% or 12% at constant currency. This is double the growth rate of our strong performance in the first three quarters of the year. Key Branded Middleware grew 13%, gaining share for the 13th straight quarter, as we continue to extend our lead in the middleware market. Software revenue continues to mix to the faster-growing Branded Middleware. In the quarter, it accounted for 66% of our total Software, up three points from this time last year. We had very strong performance in our Key Middleware brands

[Patricia Murphy:]

Thank you, Mark. Before we begin the Q&A, I'd like to remind you of a couple of items. First, we have supplemental charts at the end of the deck that complement our prepared remarks. And second, I'd ask you to refrain from multi-part questions. When we conclude the Q&A, I'll turn the call back to Mark for final comments. Operator, please open it up for questions.

[Operator:]

[Operator Instructions] The first question comes from Toni Sacconaghi from Sanford Bernstein.

[Toni Sacconaghi:]

I was wondering if you could comment -- you had mentioned on the conference call that you basically had once-in-a-decade type performance in two key areas of your business

[Mark Loughridge:]

Yes, great question, Toni. I think this is an indication, from our perspective, of the momentum that we're building as we enter 2011. So let me -- per your question, let's walk down it by element. If you look at the first quarter of 2011, I expect that as we've studied it, it will be very similar in nature to our fourth quarter. In other words, really driven by the Hardware and Software transactional elements of our business. So as we go from the fourth quarter to the first quarter, once again, we expect to see a double-digit revenue growth out of both the Hardware and Software sides of our business. And on the Services side of the business, with the increase that we saw in our backlog, again up $4 billion year-to-year, up $7 billion quarter-to-quarter, and we move into the first quarter, we would expect to see an improvement in our revenue growth rate in the first compared to the fourth and have that extend through the year now at a modest rate, because it's driven more by backlog than just the more volatile elements of signings. And with the margin performance that we expect based on the actions we're taking, we would expect to have kind of mid-single digit growth in our Services business profitability. So if you look at that, I would interpret that as kind of an extension of the momentum that we see. If you look at the Hardware content in a little more detail, we had just a great start to the zSeries rollout. And as we look at the opportunity on both the Hardware side, whether that be that z content, p content, X series, we see momentum going into the first, as we do on our Software side. So everything we look at looks like a characterization that's more similar. Now the one element I'll point out, in the fourth quarter of the year, those Hardware and Software transactional businesses are about 50% of the business, and the annuity content is about 50%. When we go into the first quarter, just given the seasonality of those individual businesses, it's really characterized more by like 60% on the Services side and 40% on the Hardware and Software side. But we anticipate that this is an indication of momentum going into 2011.

[Patricia Murphy:]

Can we go to the next question, please?

[Operator:]

The next question comes from Ben Reitzes with Barclays Capital.

[Benjamin Reitzes:]

With regard to earnings, you're talking about close to 12% non-GAAP EPS growth or operating EPS growth. Can you just talk about the quarterly distribution as we go throughout the year? The comps are pretty comparable on a gross basis but maybe what you're seeing in terms of seasonality. And then if you could also just comment on whether the movement to non-GAAP makes it easier to make acquisitions, that'll be great, considering it will freeze up the potential penalties.

[Mark Loughridge:]

Sure. Let me first talk about the distribution through 2011. On the operating growth rate of 11%, I'd reiterate that 11%, it puts us right on that plumb line that you might draw from 2010 to our 2015 objective of about $20. But around that, given the momentum that we're entering like our strong product set and opportunity set, I would expect the first half of the year to be a point or two stronger than that. And with that, the back half of the year could be a point or two points less than that. By the fourth quarter of next year, we'll be wrapping around on this very powerful fourth quarter that we had this year. Now remember that, that 11% is our at-least number. So it's an implication of what we see in the distribution of at least. So I think that's a fair reflection. Now if you look at the structure of our GAAP versus non-GAAP content that we would call our operating view of the business, really, that was intended. And I think it's very appropriate to show how our operating units are performing without being distracted by the noncash, non-operational elements, either in our pension content or in acquisitions. So I wouldn't say it makes it easier to do acquisitions, but I do think it gives a better operational indication of performance of the business and a better way to gauge and measure our performance on our way to 2015.

[Patricia Murphy:]

Can we go to the next question, please?

[Operator:]

The next question comes from Katy Huberty with Morgan Stanley.

[Kathryn Huberty:]

Do you view the $22 billion of signings this quarter as indication of a clear change in momentum for the services industry? And in that context, is growth in Services signings likely in 2011?

[Mark Loughridge:]

Well, if you look at the Services content, as we have pointed out before, no, they're not evenly distributed through a year, right? So it can be kind of more volatile. Some would say, from some perspective, a little less predictable. That's why we did the analysis, Katy, within our announcement today, and we did the analysis on the relative stability of backlog compared to signings. Now that said, I thought we did have a terrific, just a terrific quarter on signings, I mean, $22 billion, up 18%; outsourcing, up 24%; our transactional business up 8% behind that. I'm telling you, we had really strong performance against expanding opportunities in the growth markets. I mean, our signings and growth markets were up more than 250%. I mean, imagine that, big contracts like the Bharti contract in Africa rolling out. So I do think we have a strong opportunity set going forward. We're excited about that opportunity content. But if you look at the drivers behind performance, especially in the Outsourcing side, I would be looking at the dynamics behind backlog more than I would necessarily signings.

[Patricia Murphy:]

Cynthia, next question please.

[Operator:]

The next question comes from Rob Cihra with Caris & Company.

[Robert Cihra:]

If you just -- even given how strong your Hardware business was in the quarter, obviously, driven by mainframe, the POWER server was relatively soft even with the new products cycle through the year end, the high end in the quarter. I mean, is there any -- it would seem like about as good a quarter as you can have given your product cycles. Is it just indicative that the UNIX market is that slow even with you gaining share? Or is there anything else going on in the quarter?

[Mark Loughridge:]

Yes, let's talk a little bit about -- first of all, no question about it, we had a great, great quarter on our System z rollout. It's just really, really powerful across the board, but let's talk about System p. So first of all, for all of system technology and for p individually, we're talking about three points of share gain. So that's very strong share performance for the group as a whole and for pSeries individually. But I'd take it at the components of p to better understand how we view the dynamics. So on our new entry p, I mean, we were up 30% in the quarter, and even at 30%, we were sold out on a number of models. So p, at our entry kind of had very, very strong reception in the marketplace. Our mid-range was up 70%. Now that's the third quarter that we have had really strong growth in the mid-range content that we introduced at the beginning of the year. Our high-end content, and this high end is one of the -- is the biggest UNIX server in the industry. It does have a longer sell cycle behind it. But if you look at the quarter-to-quarter dynamics, I mean, we did 3x the high-end content in the fourth quarter compared to the third quarter of the year. So we think with that, we have a lot of momentum on all three elements

[Patricia Murphy:]

Let's go to the next question please.

[Operator:]

The next question comes from Joseph Foresi with Janney Montgomery Scott.

[Joseph Foresi:]

I was wondering if we could just look at the Services again just maybe from a different angle heading into 2011. Maybe you could talk about any differences or any changes that you're seeing in that business heading into 2011 versus where you were heading into 2010.

[Mark Loughridge:]

Well, first of all, going into 2011, I want to highlight that we start the year -- again, we started the year with a very strong backlog of business, up $4 billion year-to-year. And that $4 billion puts us in a good starting point as we go in the year. Secondly, if you look at the outsourcing content, the analysis we did, we showed you for the first time, analysis on that first year rollout behind the backlog, and you could see in that rollout on the outsourcing content that was up about 3%. And that accounts for about 85% of the revenue in the Outsourcing business, so a strong statement there as well. And then the last thing I would reiterate, we had really, really strong signings performance again in the growth markets, which I think is an indication of how that opportunity set is opening for us. And the best example, I think, really is the Bharti contract we have in Africa.

[Patricia Murphy:]

Can we go to the next question, please?

[Operator:]

The next question comes from Richard Gardner with Citigroup.

[John Slack:]

This is John Slack from Richard's team. Wondering if you could give a little more color on -- words on the drivers there from a product failing perspective?

[Mark Loughridge:]

Yes, if you look at the Software side of the business, again, adjusted for the divested PLM content, WebSphere was up 34%, very, very strong performance there. Information Management was up 12%, as well as Rational, Tivoli up 14%. So across the Key Branded Middleware, very strong performance. But I think one of the aspects that I would draw your attention to are really the cross business unit big initiatives that we're driving for growth. And we covered this at our Analyst Meeting in May, like Business Analytics, growth markets, Smarter Planet and cloud. Those are initiatives that cut across the businesses with services content, software content, hardware content, that they had big implications to the performance in our Software business. So as an example, Business Analytics was up 19%. Our growth market's up 13%. Smarter Planet -- I mean, we did up $3 billion in Smarter Planet, up double digits. Cloud, we had thousands of engagements, and it should be doubling as we go through 2015, emphasizing our focus on the enterprise and security of the data set within that enterprise. So I think it's not just a story of how the Key Branded Middleware elements perform, it's also how those key growth initiatives that cut across the businesses performed as well, and we had a very strong fourth there.

[Patricia Murphy:]

Can we go to the next question please?

[Operator:]

The next question comes from Moshe Katri from Cowen and Company.

[Moshe Katri:]

What sort of revenue growth and margins are embedded in your 2011 EPS guidance?

[Mark Loughridge:]

Well, we generally don't give revenue guidance, and I think that's a function of how we built the longer-term models. If you look at the longer-term model, it's a combination of our emphasis on revenue, in our investments, on our key growth initiatives. It's our margin expansion as we mix to higher-margin elements of the portfolio and drive efficiencies in running our business. It's how we utilize capital for share repurchase. So I don't think one element, such as revenue, tells the story as effectively as it does if you stick to the roadmap content in EPS. So if you look at the roadmap, I think we had a strong performance in the fourth quarter relative to that, 7% revenue growth, a couple of points stronger than the model objective of about 5%. We had good margin expansion in the year, both net and PTI, up 8/10 point and good share repurchase. So going into the first quarter, however, I go back to the comments that I'd made by business unit. So going into the first, we see double-digit revenue performance across the Hardware and Software content and an improving vector on revenue growth for our Services business, albeit at a modest slope, as we go through the year, taking into consideration that, that mix between Services and the Hardware-Software transaction was more like a 60-40 mix than 50-50 in the fourth quarter. But all of those indicate momentum, in my opinion.

[Patricia Murphy:]

Can we go to the next question please?

[Operator:]

The next question comes from Louis Miscioscia with Collins Stewart.

[Louis Miscioscia:]

We've heard about accelerating trends in Europe and obviously, it looks like with European performance that actually came through, and obviously, you had the same here in the U.S. Maybe if you can give us a comment as to what CEOs are thinking both in the first half and the second half of the year. Should we see and expect increasing and accelerating IT spending?

[Mark Loughridge:]

Well, rather than describe this in terms of IT spend in the industry, I would look at it more on the performance that we had in our own business unit now, and that kind of has a number of elements. First of all, in the fourth, I thought the major markets did a great job and showed the results of the investments that we've made and more stability in the economic environment, but it isn't just the economic environment. You've got to really point to the performance of those individual businesses. So the U.S. was up 10%. France was up 17%. We had good growth in Italy. We had good growth in Spain. So the major markets had real performance in the fourth quarter that we're encouraged by as we entered 2011. As well, growth markets up 13% maintained that eight-point differential to the major markets. As I had said earlier, we had signings greater than 250%. The BRIC countries were up 17%. China was up 25%, so real momentum that we think is ongoing in the growth markets as well.

[Patricia Murphy:]

Can we go to the next question please?

[Operator:]

The next question comes from Jason Maynard with Wells Fargo.

[Jason Maynard:]

The industry seems to be evolving towards this integrated software and hardware positioning, and you're seeing it in all sorts of acquisitions in the market. I'm just curious, when you look at the strength you had in Software and obviously, the strength you had in Hardware, and you wrap analytics in, can you maybe talk a little bit about what are the drivers that drive these competitive displacements?

[Mark Loughridge:]

Yes, I think, first of all, I do think that integrated play is a very strong play. And if you look at the industry, nobody has that hardware, software, services complement the way we do. Now you may see a lot of businesses putting together strategies along that perspective or describing that future state in that perspective, but if you just look at who's doing it right now, it's really IBM with that hardware, software, services complement. And you don't build that overnight. We've been working on this for decades. Secondly, I think it's really the strength of those cross-business unit growth initiatives, and I would return to make the point that in Business Analytics, that cuts across our businesses

[Patricia Murphy:]

Can we go to the next question please?

[Operator:]

The next question comes from David Grossman with Stifel, Nicolaus.

[David Grossman:]

Mark, 2010 was a very robust year for acquisitions, and I think you stated that you expect 2% or so annual growth from acquisitions. Is that an assumption based on run rate revenue when you acquire it? And if not, how should we think about the integration periods and growth rates of acquired companies, particularly given that the size of the deals that you're doing are increasing?

[Mark Loughridge:]

Yes. If you look at acquisitions, we kind of gave a framework for how we look at acquisition performance over the lifespan. And within that, we're very, very focused on the acceleration of both their revenue growth and also their ability to be accretive to IBM by that second year. So when you look at the deal review meetings that we run, generally on a weekly basis, I would look at it and say the internal rate return of the deal and the payback of the deal are table stakes. If you don't have those, don't even show up at the meeting, because these are financial transactions for us. We don't do "strategic transactions" that don't meet our financial objectives. But the real meat of the decision process is the due diligence and that integration plan to accelerate in those first two years. And it's against those objectives that I think we've been really pretty successful.

[Patricia Murphy:]

Can we go to the next question please?

[Operator:]

There are no further questions in queue.

[Mark Loughridge:]

Great. Well, thank you very much for joining us. Let me just make a few comments to wrap up the call. We just delivered a great quarter to cap off a great year. Our revenue growth of 7% was the best of the decade, driven by our Hardware and Software transaction businesses. We expanded margins and delivered 16% growth in earnings per share. We grew free cash flow $1.5 billion in the fourth quarter and generated over $16 billion for the year. So now we've finished our 2010 roadmap. We exceeded the high end of the objective by more than $0.50 despite the headwinds created by the recession. As you look at 2011, we're entering with a lot going for us

[Operator:]

Thank you for participating on today's call. The conference has now ended. You may disconnect at this time.