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
View source
version on businesswire.com: https://www.businesswire.com/news/home/20180417006600/en/
IBMIan Colley, 914-434-3043colley@us.ibm.comorJohn Bukovinsky,
732-618-3531jbuko@us.ibm.com
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