IBM International Business Machines Corp

Revenue Up 5 Percent Year to Year; Improving Gross Margin Trajectory

IBM (NYSE:IBM)

Highlights

• Revenue of $19.1 billion, up 5 percent (flat adjusting for currency)
• Gross margin reflects broad-based improvement in year-to-year performance compared to fourth quarter
• GAAP EPS from continuing operations of $1.81; Operating (non-GAAP) EPS of $2.45, up 4 percent
• Strategic imperatives revenue of $37.7 billion over last 12 months, up 12 percent (up 10 percent adjusting for currency); represents 47 percent of IBM revenue
• Cloud revenue of $17.7 billion over last 12 months, up 22 percent (up 20 percent adjusting for currency)
• As-a-service annual exit run rate for cloud revenue of $10.7 billion in the quarter, up 25 percent year to year (up 20 percent adjusting for currency)
• Maintains full-year operating (non-GAAP) EPS and free cash flow expectations

IBM (NYSE: IBM) today announced first-quarter results.

"In the first quarter we maintained momentum in our business, with reported revenue growth in total and across our major segments," said Ginni Rometty, IBM chairman, president and chief executive officer. "These results reinforce that our clients value our innovative technologies, our industry expertise and our commitment and actions for the responsible stewardship of their privacy and data. This is also reflected in our leadership positions in enterprise cloud, AI and security."

  FIRST QUARTER 2018     Pre-tax   Gross Profit Diluted EPS     Net Income     Income     Margin   GAAP from Continuing Operations $1.81 $1.7B $1.1B 43.2% Year/Year   -2%     -4%     -20%     -0.5Pts Operating (Non-GAAP) $2.45 $2.3B $1.7B 43.7% Year/Year (includes Significant Items) 4% 2% -14% -0.7Pts Year/Year Impact of Significant Items   -4Pts *   -4Pts *   -21Pts **   -0.4Pts **   As-a-service Strategic annual exit REVENUE   Total IBM     Imperatives     Cloud     run rate As reported (US$) $19.1B $9.0B $4.2B $10.7B Year/Year   5%     15%     20%     25% Year/Year adjusting for currency   0%     10%     14%     20% * Year-to-year impact of actions to continue to reposition the business and discrete tax benefits ** Year-to-year impact of actions to continue to reposition the business  

"The multi-year shift in our investment strategy is paying off as IBM leads in the emerging, high-value segments of the enterprise IT industry," said James Kavanaugh, IBM senior vice president and chief financial officer. "Revenue, operating net income and free cash flow increased in the quarter, with broad-based improvement in our gross margin trajectory, as we continue to deliver shareholder value."

Significant Items Impacting Earnings Growth

For the first quarter of 2018, pre-tax income was $1.1 billion and net income from continuing operations was $1.7 billion. Operating (non-GAAP) pre-tax income was $1.7 billion and operating (non-GAAP) net income was $2.3 billion. The year-to-year decrease of 14 percent in operating (non-GAAP) pre-tax income includes a negative impact of 21 points from actions to continue to reposition the business. The year-to-year increase of 2 percent in operating (non-GAAP) net income includes a negative impact of 4 points from these actions and discrete tax benefits.

IBM's reported GAAP and operating (non-GAAP) tax rates for the first quarter include a $0.8 billion discrete tax benefit. The company's reported GAAP tax rate also includes an additional provisional charge of $0.1 billion as a result of guidance issued in January 2018 by the Internal Revenue Service related to the enactment of the Tax Cuts and Jobs Act in December 2017. This charge is in addition to the provisional charge of $5.5 billion the company reported in its fourth-quarter 2017 earnings.

For the first quarter, IBM's ongoing GAAP and operating (non-GAAP) tax rates were approximately 14 percent and approximately 16 percent, respectively.

Strategic Imperatives Revenue

Strategic imperatives revenue over the last 12 months was $37.7 billion, up 12 percent (up 10 percent adjusting for currency). Total cloud revenue over the last 12 months was $17.7 billion, up 22 percent (up 20 percent adjusting for currency). The annual exit run rate for as-a-service revenue increased to $10.7 billion, up 25 percent (up 20 percent adjusting for currency). In the first quarter of 2018, revenues from analytics increased 9 percent (up 4 percent adjusting for currency); revenues from mobile increased 19 percent (up 14 percent adjusting for currency); and revenues from security increased 65 percent (up 60 percent adjusting for currency).

Cash Flow and Balance Sheet

In the first quarter, the company generated net cash from operating activities of $4.6 billion, or $2.2 billion excluding Global Financing receivables. IBM’s free cash flow was $1.3 billion. IBM returned $2.2 billion to shareholders through $1.4 billion in dividends and $0.8 billion in gross share repurchases. At the end of March 2018, IBM had $3.0 billion remaining in the current share repurchase authorization.

IBM ended the first quarter of 2018 with $13.2 billion of cash on hand. Debt totaled $46.4 billion, including Global Financing debt of $31.7 billion. The balance sheet remains strong and is well positioned over the long term.

Segment Results for First Quarter

• Cognitive Solutions (includes solutions software and transaction processing software) -- revenues of $4.3 billion, up 6 percent (up 2 percent adjusting for currency), driven by solutions software, including security, analytics, and industry platforms; and transaction processing software.
• Global Business Services (includes consulting, global process services and application management) -- revenues of $4.2 billion, up 4 percent (down 1 percent adjusting for currency). Strategic imperatives revenue grew 12 percent led by the cloud consulting practice, with double-digit growth in analytics and mobile.
• Technology Services & Cloud Platforms (includes infrastructure services, technical support services and integration software) -- revenues of $8.6 billion, up 5 percent (down 1 percent adjusting for currency). Strategic imperatives revenue grew 24 percent, driven by hybrid cloud services, security and mobile.
• Systems (includes systems hardware and operating systems software) -- revenues of $1.5 billion, up 8 percent (up 4 percent adjusting for currency) driven by growth in IBM Z and Power.
• Global Financing (includes financing and used equipment sales) -- revenues of $405 million, flat year to year (down 4 percent adjusting for currency).

Full-Year 2018 Expectations

The company continues to expect operating (non-GAAP) diluted earnings per share of at least $13.80. The company expects GAAP diluted earnings per share of at least $11.58. Operating (non-GAAP) diluted earnings per share exclude $2.22 per share of charges for amortization of purchased intangible assets, other acquisition-related charges and retirement-related charges as well as ongoing impacts from the enactment of U.S. Tax Reform.

IBM continues to expect free cash flow of approximately $12 billion, with a realization rate greater than 100 percent.

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. Forward-looking statements are based on the company’s current assumptions regarding future business and financial performance. These statements involve a number of risks, uncertainties and other factors that could cause actual results to differ materially, including the following: a downturn in economic environment and client spending budgets; the company’s failure to meet growth and productivity objectives; a failure of the company’s innovation initiatives; damage to the company’s reputation; risks from investing in growth opportunities; failure of the company’s intellectual property portfolio to prevent competitive offerings and the failure of the company to obtain necessary licenses; cybersecurity and data privacy considerations; fluctuations in financial results, impact of local legal, economic, political and health conditions; adverse effects from environmental matters, tax matters and the company’s pension plans; ineffective internal controls; the company’s use of accounting estimates; the company’s ability to attract and retain key employees and its reliance on critical skills; impacts of relationships with critical suppliers; product quality issues; impacts of business with government clients; currency fluctuations and customer financing risks; impact of changes in market liquidity conditions and customer credit risk on receivables; reliance on third party distribution channels and ecosystems; the company’s ability to successfully manage acquisitions, alliances and dispositions; risks from legal proceedings; risk factors related to IBM securities; and other risks, uncertainties and factors discussed in the company’s Form 10-Qs, Form 10-K and in the company’s other filings with the U.S. Securities and Exchange Commission (SEC) or in materials incorporated therein by reference. Any forward-looking statement in this release speaks only as of the date on which it is made. The company assumes no obligation to update or revise any forward-looking statements.

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 --

• presenting operating (non-GAAP) earnings per share amounts and related income statement items;
• adjusting for free cash flow;
• adjusting for currency (i.e., at constant currency).

Free cash flow guidance is derived using an estimate of profit, working capital and operational cash outflows. The company views Global Financing receivables as a profit-generating investment, which it seeks to maximize and therefore it is not considered when formulating guidance for free cash flow. As a result, the company does not estimate a GAAP Net Cash from Operations expectation metric.

The rationale for management’s use of these non-GAAP measures is included in Exhibit 99.2 in the Form 8-K 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 5:00 p.m. EDT, today. The Webcast may be accessed via a link at http://www.ibm.com/investor/events/earnings/1q18.html. Presentation charts will be available shortly before the Webcast.

Financial Results Below (certain amounts may not add due to use of rounded numbers; percentages presented are calculated from the underlying whole-dollar amounts).

INTERNATIONAL BUSINESS MACHINES CORPORATION COMPARATIVE FINANCIAL RESULTS (Unaudited; Dollars in millions except per share amounts)     Three Months Ended March 31, 2018   2017 REVENUE   Cognitive Solutions $4,299 $4,062 Global Business Services 4,174 4,006 Technology Services & Cloud Platforms 8,625 8,216 Systems 1,500 1,395 Global Financing 405 405 Other 69   71 TOTAL REVENUE 19,072 18,155   GROSS PROFIT 8,247 7,944 *   GROSS PROFIT MARGIN Cognitive Solutions 76.3% 77.3% * Global Business Services 23.3% 23.4% * Technology Services & Cloud Platforms 38.2% 38.8% * Systems 43.7% 47.5% * Global Financing 34.4% 31.8% *   TOTAL GROSS PROFIT MARGIN 43.2% 43.8% *   EXPENSE AND OTHER INCOME S,G&A 5,445 5,027 * R,D&E 1,405 1,484 *

Intellectual property and custom development income

(317) (445) Other (income) and expense 413 319 * Interest expense 165 135       TOTAL EXPENSE AND OTHER INCOME 7,111 6,521 *   INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 1,136 1,424 Pre-tax margin 6.0% 7.8% Provision for / (Benefit from) income taxes (540) (329) Effective tax rate -47.5% -23.1%   INCOME FROM CONTINUING OPERATIONS $1,675 $1,753 DISCONTINUED OPERATIONS Income/(Loss) from discontinued operations, net of taxes 4   (3)   NET INCOME $1,679   $1,750   EARNINGS PER SHARE OF COMMON STOCK: Assuming Dilution Continuing Operations $1.81 $1.85 Discontinued Operations $0.00   $0.00 TOTAL $1.81   $1.85 Basic Continuing Operations $1.82 $1.86 Discontinued Operations $0.00   $0.00 TOTAL $1.82   $1.86  

WEIGHTED-AVERAGE NUMBER OF COMMON SHARES OUTSTANDING (M's):

Assuming Dilution 925.4 947.8 Basic 920.7 942.4  

* Recast to reflect adoption of the FASB guidance on presentation of net benefit cost.

  INTERNATIONAL BUSINESS MACHINES CORPORATION CONDENSED CONSOLIDATED BALANCE SHEET (Unaudited)   At   At (Dollars in Millions) March 31, December 31, 2018 2017 ASSETS:   Current Assets: Cash and cash equivalents $11,949 $11,972 Restricted cash 313 262 * Marketable securities 893 608 Notes and accounts receivable - trade, net 7,778 8,928 Short-term financing receivables, net 20,245 21,721 Other accounts receivable, net 1,206 981 Inventory 1,753 1,583 Deferred Costs 2,413 1,820 ** Prepaid expenses and other current assets 2,573 1,860 * **     Total Current Assets 49,122 49,735   Property, plant and equipment, net 11,278 11,116 Long-term financing receivables, net 8,856 9,550 Prepaid pension assets 5,129 4,643 Deferred costs 2,593 2,136 ** Deferred taxes 5,111 4,862 Goodwill and intangibles, net 40,253 40,531 Investments and sundry assets 2,942 2,783 **     Total Assets $125,285 $125,356   LIABILITIES:   Current Liabilities: Taxes $2,918 $4,219 Short-term debt 5,977 6,987 Accounts payable 5,736 6,451 Deferred income 13,059 11,552 Other liabilities 8,043 8,153     Total Current Liabilities 35,733 37,363   Long-term debt 40,410 39,837 Retirement related obligations 16,750 16,720 Deferred income 3,852 3,746 Other liabilities 10,250 9,965     Total Liabilities 106,995 107,631   EQUITY:   IBM Stockholders' Equity: Common stock 54,712 54,566 Retained earnings 156,371 153,126 Treasury stock -- at cost (164,334) (163,507) Accumulated other comprehensive income/(loss) (28,583) (26,592)     Total IBM Stockholders' Equity 18,166 17,594   Noncontrolling interests 124 131     Total Equity 18,290 17,725     Total Liabilities and Equity $125,285 $125,356  

* Recast to reflect adoption of the FASB guidance on restricted cash.

** Recast to conform to current period presentation.

  INTERNATIONAL BUSINESS MACHINES CORPORATION CASH FLOW ANALYSIS (Unaudited)   Three Months Ended (Dollars in Millions) March 31, 2018   2017   Net Cash Provided by Operating Activities per GAAP: $4,602 $3,955     Less: change in Global Financing (GF) Receivables 2,360 2,047 Capital Expenditures, Net (893) (819)   Free Cash Flow 1,349 1,088   Acquisitions (71) (109) Divestitures - (1) Dividends (1,382) (1,321) Share Repurchase (777) (1,293) Non-GF Debt (547) 244 Other (includes GF Net Receivables and GF Debt) 1,741 3,513 *   Change in Cash, Cash Equivalents, Restricted Cash and Short-term Marketable Securities $313 $2,121 *  

* Recast to reflect adoption of the FASB guidance on restricted cash.

  INTERNATIONAL BUSINESS MACHINES CORPORATION CASH FLOW (Unaudited)     Three Months Ended (Dollars in Millions) March 31, 2018   2017   Net Income from Operations $1,679 $1,750 Depreciation/Amortization of Intangibles 1,114 1,098 Stock-based Compensation 116 129 Working Capital / Other (668) (1,070) Global Financing A/R 2,360 2,047 Net Cash Provided by Operating Activities $4,602 $3,955 Capital Expenditures, net of payments & proceeds (893) (819) Divestitures, net of cash transferred - (1) Acquisitions, net of cash acquired (71) (109) Marketable Securities / Other Investments, net (800) 1,231 * Net Cash Used in Investing Activities ($1,764) $303 * Debt, net of payments & proceeds (713) 476 Dividends (1,382) (1,321) Common Stock Repurchases (777) (1,293) Common Stock Transactions - Other (37) 4 Net Cash Used in Financing Activities ($2,909) ($2,134) Effect of Exchange Rate changes on Cash 100 100 Net Change in Cash, Cash Equivalents and Restricted Cash $28 $2,223 *   * Recast to reflect adoption of the FASB guidance on restricted cash.   INTERNATIONAL BUSINESS MACHINES CORPORATION SEGMENT DATA (Unaudited)   FIRST - QUARTER 2018     Technology     Global Services & (Dollars in Millions) Cognitive Business Cloud Global Solutions   Services   Platforms   Systems   Financing Revenue External $4,299 $4,174 $8,625 $1,500 $405 Internal 780   89   141   153   429 Total Segment Revenue $5,079 $4,263 $8,766 $1,653 $834   Pre-tax Income from Continuing Operations 1,333 145 436 (203) 377   Pre-tax margin 26.2% 3.4% 5.0% (12.3)% 45.1%     Change YTY Revenue - External 5.8% 4.2% 5.0% 7.5% 0.0% Change YTY Revenue - External @constant currency 1.8% (1.2)% (0.6)% 3.7% (3.9)%   FIRST - QUARTER 2017 Technology Global Services & (Dollars in Millions) Cognitive Business Cloud Global Solutions   Services   Platforms   Systems   Financing Revenue External $4,062 $4,006 $8,216 $1,395 $405 Internal 716   86   160   167   363 Total Segment Revenue $4,778 $4,092 $8,376 $1,562 $768   Pre-tax Income from Continuing Operations * 1,268 281 673 (188) 311   Pre-tax margin * 26.5% 6.9% 8.0% (12.0)% 40.4%   * Recast to reflect adoption of the FASB guidance on presentation of net benefit cost.   INTERNATIONAL BUSINESS MACHINES CORPORATION U.S. GAAP TO OPERATING (Non-GAAP) RESULTS RECONCILIATION (Unaudited; Dollars in millions except per share amounts)   FIRST - QUARTER 2018 CONTINUING OPERATIONS   Acquisition-   Retirement-   Tax Reform   Related Related One-Time Operating GAAP   Adjustments*   Adjustments**   Charge   (Non-GAAP)   Gross Profit $8,247 $93 $ - - $8,340   Gross Profit Margin 43.2% 0.5Pts 0.0Pts - 43.7%   S,G&A 5,445 (110) - - 5,335   R,D&E 1,405 - - - 1,405   Other (Income) & Expense 413 - (402) - 11   Total Expense & Other (Income) 7,111 (110) (402) - 6,600   Pre-tax Income from Continuing Operations 1,136 203 402 - 1,740   Pre-tax Income Margin from Continuing Operations 6.0% 1.1Pts 2.1Pts - 9.1%   Provision for Income Taxes*** (540) 39 76 (107) (532)   Effective Tax Rate (47.5)% 7.8Pts 15.4Pts -6.1Pts (30.5)%   Income from Continuing Operations 1,675 164 325 107 2,272   Income Margin from Continuing Operations 8.8% 0.9Pts 1.7Pts 0.6Pts 11.9%   Diluted Earnings Per Share: Continuing Operations $1.81 $0.17 $0.35 $0.12 $2.45     FIRST - QUARTER 2017 CONTINUING OPERATIONS Acquisition- Retirement- Related Related Operating GAAP   Adjustments*   Adjustments**   (Non-GAAP)   Gross Profit $7,944 $119 $ - $8,063   Gross Profit Margin 43.8% 0.7Pts 0.0Pts 44.4%   S,G&A 5,027 (139) - 4,887   R,D&E 1,484 - - 1,484   Other (Income) & Expense 319 (4) (347) (31)   Total Expense & Other (Income) 6,521 (143) (347) 6,031   Pre-tax Income from Continuing Operations 1,424 262 347 2,033   Pre-tax Income Margin from Continuing Operations 7.8% 1.4Pts 1.9Pts 11.2%   Provision for Income Taxes*** (329) 67 70 (192)   Effective Tax Rate (23.1)% 6.3Pts 7.4Pts (9.4)%   Income from Continuing Operations 1,753 195 277 2,224   Income Margin from Continuing Operations 9.7% 1.1Pts 1.5Pts 12.3%   Diluted Earnings Per Share: Continuing Operations $1.85 $0.21 $0.29 $2.35

* Includes amortization of purchased intangible assets, in process R&D, severance cost for acquired employees, vacant space for acquired companies, deal costs and acquisition integration tax charges.** Includes retirement-related interest cost, expected return on plan assets, recognized actuarial losses or gains, amortization of transition assets, other settlements, curtailments, amortization of prior service cost and insolvency insurance. First quarter 2017 adjustments were recast to reflect the adoption of the FASB guidance on net benefit cost.*** Tax impact on operating (non-GAAP) pre-tax income from continuing operations is calculated under the same accounting principles applied to the As Reported pre-tax income under ASC 740, which employs an annual effective tax rate method to the results.

  INTERNATIONAL BUSINESS MACHINES CORPORATION RECONCILIATION OF OPERATING EARNINGS PER SHARE (Unaudited)   2018

EPS Guidance

Expectations GAAP Diluted EPS at least $11.58 Operating EPS (non-GAAP) at least $13.80   Adjustments Acquisition-related Charges * $0.78 Non-Operating Retirement-Related Items $1.32 Tax Reform One-time Charge $0.12   * Includes acquisitions as of March 31, 2018

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IBMIan Colley, 914-434-3043colley@us.ibm.comorJohn Bukovinsky, 732-618-3531jbuko@us.ibm.com