IBM International Business Machines Corp

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

Acceleration in Cloud Revenue Growth; Continued Margin Expansion

Highlights

First Quarter:

• GAAP EPS from continuing operations of $1.78
• Operating (non-GAAP) EPS of $2.25
• Revenue of $18.2 billion, down 4.7 percent (down 0.9 percent adjusting for currency)
• Cloud revenue growth accelerated in the quarter; now $19.5 billion over the last 12 months, up 10 percent (up 12 percent adjusting for currency)
• As-a-service annual exit run rate for cloud revenue of $11.7 billion, up 10 percent year to year (up 15 percent adjusting for currency)
• Gross profit margin: GAAP, up 100 basis points; Operating (non-GAAP), up 90 basis points-- GBS gross profit margin up 280 basis points; GTS up 110 basis points

• Pre-tax income margin: GAAP, up 440 basis points; Operating (non-GAAP), up 320 basis points
• Maintains full-year EPS and free cash flow expectations

"In the first quarter, our cloud revenue growth accelerated, and we again grew in key, high-value areas in Cloud and Cognitive Software and in consulting,” said Ginni Rometty, IBM chairman, president and chief executive officer. "IBM’s investments in innovative technologies coupled with our industry expertise and our commitment to trust and security position us well to help clients move to chapter two of their digital reinvention."

          FIRST QUARTER 2019     Pre-tax Gross Diluted Net Pre-tax Income Profit EPS   Income   Income   Margin   Margin   GAAP from Continuing Operations $1.78 $1.6B $1.9B 10.4% 44.2% Year/Year   -2%   -5%   66%   4.4Pts   1.0Pts   Operating (Non-GAAP) $2.25 $2.0B $2.2B 12.3% 44.7% Year/Year   -8%   -12%   28%   3.2Pts   0.9Pts  

"Our results reflect the fundamental changes we have made to our business, allowing us to generate greater operating leverage. In the first quarter, we significantly expanded profit margins, led by our services businesses," said James Kavanaugh, IBM senior vice president and chief financial officer. "Our focus on prioritizing our investments in the emerging high-value segments of our industry has enabled us to drive higher profitability and strong cash generation."

Cash Flow and Balance Sheet

In the first quarter, the company generated net cash from operating activities of $4.8 billion, or $2.3 billion, excluding Global Financing receivables. IBM’s free cash flow was $1.7 billion. IBM returned $2.3 billion to shareholders through $1.4 billion in dividends and $0.9 billion in gross share repurchases. At the end of March 2019, IBM had $2.4 billion remaining in the current share repurchase authorization.

IBM ended the first quarter with $18.1 billion of cash on hand. Debt totaled $50.0 billion, including Global Financing debt of $29.5 billion. The balance sheet remains strong and is well positioned for the long term.

Segment Results for First Quarter

• Cloud & Cognitive Software (includes cloud and data platforms, cognitive applications and transaction processing platforms) -- revenues of $5.0 billion, down 2 percent (up 2 percent adjusting for currency), led by cognitive applications, up 2 percent (up 4 percent adjusting for currency), and by cloud and data platforms, down 2 percent (up 2 percent adjusting for currency).
• Global Business Services (includes consulting, application management and global process services) -- revenues of $4.1 billion, flat year to year (up 4 percent adjusting for currency), with growth in consulting and global process services. Gross profit margin increased 280 basis points.
• Global Technology Services (includes infrastructure and cloud services and technology support services) -- revenues of $6.9 billion, down 7 percent (down 3 percent adjusting for currency), with growth in hybrid cloud revenue. Gross profit margin increased 110 basis points.
• Systems (includes systems hardware and operating systems software) -- revenues of $1.3 billion, down 11 percent (down 9 percent adjusting for currency), with growth in Power, offset by the impact of the IBM Z product cycle dynamics and weakness in Storage.
• Global Financing (includes financing and used equipment sales) -- revenues of $406 million, flat year to year (up 4 percent adjusting for currency).

Full-Year 2019 Expectations

The company continues to expect GAAP diluted earnings per share of at least $12.45, and operating (non-GAAP) diluted earnings per share of at least $13.90. Operating (non-GAAP) diluted earnings per share exclude $1.45 per share of charges for: amortization of purchased intangible assets and other acquisition-related charges, including pre-closing charges, such as financing costs, associated with the Red Hat acquisition; retirement-related charges; and tax reform enactment impacts.

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

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, including integration challenges, failure to achieve objectives, the assumption of liabilities, and higher debt levels; legal proceedings and investigatory risks; 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/1q19.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,   2019   2018   REVENUE Cloud & Cognitive Software $5,037 $5,116 * Global Business Services 4,119 4,115 * Global Technology Services 6,875 7,421 * Systems 1,328 1,500 Global Financing 406 405 Other 417   515 * TOTAL REVENUE 18,182 19,072   GROSS PROFIT 8,043 8,247   GROSS PROFIT MARGIN Cloud & Cognitive Software 75.1% 76.3% * Global Business Services 26.2% 23.4% * Global Technology Services 33.7% 32.6% * Systems 46.2% 43.7% Global Financing 34.9% 34.4%   TOTAL GROSS PROFIT MARGIN 44.2% 43.2%     EXPENSE AND OTHER INCOME S,G&A 4,691 5,445   R,D&E 1,433 1,405   Intellectual property and custom development income (101) (317)   Other (income) and expense (73) 413   Interest expense 210   165 TOTAL EXPENSE AND OTHER INCOME 6,160 7,111   INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 1,883 1,136 Pre-tax margin 10.4% 6.0%   Provision for (Benefit from) income taxes 289 (540) Effective tax rate 15.4% (47.5)%   INCOME FROM CONTINUING OPERATIONS $1,593 $1,675   DISCONTINUED OPERATIONS Income/(Loss) from discontinued operations, net of taxes (2)   4   NET INCOME $1,591   $1,679     EARNINGS / (LOSS) PER SHARE OF COMMON STOCK Assuming Dilution Continuing Operations $1.78 $1.81 Discontinued Operations $0.00   $0.00 TOTAL $1.78   $1.81   Basic Continuing Operations $1.79 $1.82 Discontinued Operations $0.00   $0.00 TOTAL $1.79   $1.82   WEIGHTED-AVERAGE NUMBER OF COMMON SHARES OUTSTANDING (M's) Assuming Dilution 893.9 925.4 Basic 889.6 920.7     * Recast to conform with 2019 presentation.   INTERNATIONAL BUSINESS MACHINES CORPORATION CONDENSED CONSOLIDATED BALANCE SHEET (Unaudited)   At   At (Dollars in Millions) March 31, December 31, 2019 2018 ASSETS:   Current Assets: Cash and cash equivalents $17,134 $11,379 Restricted cash 137 225 Marketable securities 872 618 Notes and accounts receivable - trade, net 6,987 7,432 Short-term financing receivables, net 20,287 22,388 Other accounts receivable, net 671 743 Inventory 1,771 1,682 Deferred Costs 2,368 2,300 Prepaid expenses and other current assets 2,478 2,378 Total Current Assets 52,705 49,146   Property, plant and equipment, net 10,675 10,792 Operating right-of-use assets, net * 4,634 - Long-term financing receivables, net 8,361 9,148 Prepaid pension assets 4,966 4,666 Deferred costs 2,663 2,676 Deferred taxes 5,284 5,216 Goodwill and intangibles, net 39,237 39,353 Investments and sundry assets 2,403 2,386 Total Assets $130,926 $123,382     LIABILITIES:   Current Liabilities: Taxes $2,484 $3,046 Short-term debt 10,250 10,207 Accounts payable 5,711 6,558 Deferred income 12,134 11,165 Operating lease liabilities * 1,313 - Other liabilities 6,979 7,251 Total Current Liabilities 38,871 38,227   Long-term debt 39,727 35,605 Retirement related obligations 16,467 17,002 Deferred income 3,481 3,445 Operating lease liabilities * 3,590 - Other liabilities 12,184 12,174 Total Liabilities 114,320 106,452     EQUITY:   IBM Stockholders' Equity: Common stock 55,287 55,151 Retained earnings 159,396 159,206 Treasury stock -- at cost (169,021) (168,071) Accumulated other comprehensive income/(loss) (29,182) (29,490) Total IBM Stockholders' Equity 16,481 16,796   Noncontrolling interests 126 134 Total Equity 16,607 16,929 Total Liabilities and Equity $130,926 $123,382   * Reflects the adoption of the FASB guidance on leases.   INTERNATIONAL BUSINESS MACHINES CORPORATION CASH FLOW ANALYSIS (Unaudited)     Three Months Ended (Dollars in Millions) March 31,   2019 2018   Net Cash Provided by Operating Activities per GAAP: $4,759 $4,602     Less: change in Global Financing (GF) Receivables 2,458 2,360 Capital Expenditures, Net (614) (893)   Free Cash Flow 1,688 1,349   Acquisitions (1) (71) Divestitures 33 - Dividends (1,397) (1,382) Share Repurchase (920) (777) Non-GF Debt 5,890 (547) Other (includes GF Net Receivables and GF Debt) 629 1,741   Change in Cash, Cash Equivalents, Restricted Cash and Short-term Marketable Securities $5,922 $313   INTERNATIONAL BUSINESS MACHINES CORPORATION CASH FLOW (Unaudited)       Three Months Ended (Dollars in Millions) March 31,   2019 2018   Net Income from Operations $1,591 $1,679 Depreciation/Amortization of Intangibles 1,446 1,114 Stock-based Compensation 113 116 Working Capital / Other (848) (668) Global Financing A/R 2,458 2,360 Net Cash Provided by Operating Activities $4,759 $4,602 Capital Expenditures, net of payments & proceeds (614) (893) Divestitures, net of cash transferred 33 - Acquisitions, net of cash acquired (1) (71) Marketable Securities / Other Investments, net (271) (800) Net Cash Used in Investing Activities ($853) ($1,764) Debt, net of payments & proceeds 4,232 (713) Dividends (1,397) (1,382) Common Stock Repurchases (920) (777) Common Stock Transactions - Other (51) (37) Net Cash (Used in) / Provided by Financing Activities $1,863 ($2,909) Effect of Exchange Rate changes on Cash (102) 100 Net Change in Cash, Cash Equivalents and Restricted Cash $5,668 $28   INTERNATIONAL BUSINESS MACHINES CORPORATION SEGMENT DATA (Unaudited)          

FIRST - QUARTER 2019

Cloud & Global Global (Dollars in Millions) Cognitive Business Technology Global Software   Services   Services   Systems   Financing Revenue External $5,037 $4,119 $6,875 $1,328 $406 Internal 841   74   290   163   300 Total Segment Revenue $5,879 $4,193 $7,164 $1,491 $706   Pre-tax Income (Loss) from Continuing Operations 1,767 315 275 (202) 288   Pre-tax margin 30.1% 7.5% 3.8% (13.5)% 40.8%     Change YTY Revenue - External (1.5)% 0.1% (7.4)% (11.4)% 0.2% Change YTY Revenue - External @constant currency 1.5% 4.3% (3.0)% (8.8)% 3.9%        

FIRST - QUARTER 2018

Cloud & Global Global (Dollars in Millions) Cognitive Business Technology Global Software *   Services *   Services *   Systems   Financing Revenue External $5,116 $4,115 $7,421 $1,500 $405 Internal 931   89   141   153   429 Total Segment Revenue $6,047 $4,204 $7,562 $1,653 $834   Pre-tax Income (Loss) from Continuing Operations 1,680 125 66 (203) 377   Pre-tax margin 27.8% 3.0% 0.9% (12.3)% 45.1%   * Recast to conform with 2019 presentation.   INTERNATIONAL BUSINESS MACHINES CORPORATION U.S. GAAP TO OPERATING (Non-GAAP) RESULTS RECONCILIATION (Unaudited; Dollars in millions except per share amounts)   FIRST - QUARTER 2019 CONTINUING OPERATIONS   Acquisition-   Retirement-   Tax   Related Related Reform Operating GAAP   Adjustments*   Adjustments**   Impacts   (Non-GAAP)   Gross Profit $8,043 $76 - - $8,119   Gross Profit Margin 44.2% 0.4Pts - - 44.7%   S,G&A 4,691 (124) - - 4,566   R,D&E 1,433 - - - 1,433   Other (Income) & Expense (73) 23 (138) - (187)   Interest Expense 210 (36) - - 174   Total Expense & Other (Income) 6,160 (137) (138) - 5,886   Pre-tax Income from Continuing Operations 1,883 212 138 - 2,233   Pre-tax Income Margin from Continuing Operations 10.4% 1.2Pts 0.8Pts - 12.3%   Provision for Income Taxes*** 289 49 26 (141) 224   Effective Tax Rate 15.4% 0.7Pts 0.2Pts (6.3)Pts 10.0%   Income from Continuing Operations 1,593 164 111 141 2,009   Income Margin from Continuing Operations 8.8% 0.9Pts 0.6Pts 0.8Pts 11.0%   Diluted Earnings / (Loss) Per Share: Continuing Operations $1.78 $0.18 $0.13 $0.16 $2.25     FIRST - QUARTER 2018 CONTINUING OPERATIONS Acquisition- Retirement- Tax Related Related Reform Operating GAAP   Adjustments*   Adjustments **   Impacts   (Non-GAAP)   Gross Profit $8,247 $93 - - $8,340   Gross Profit Margin 43.2% 0.5Pts - - 43.7%   S,G&A 5,445 (110) - - 5,335   R,D&E 1,405 - - - 1,405   Other (Income) & Expense 413 - (402) - 11   Interest Expense 165 - - - 165   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 (Benefit from) Income Taxes*** (540) 39 76 (107) (532)   Effective Tax Rate (47.5)% 7.8Pts 15.4Pts (6.1)Pts (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 / (Loss) Per Share: Continuing Operations $1.81 $0.17 $0.35 $0.12 $2.45  

* Includes amortization of purchased intangible assets, in process R&D, transaction costs, applicable restructuring and related expenses, tax charges related to acquisition integration and pre-closing charges, such as financing costs.

** Includes amortization of prior service costs, interest cost, expected return on plan assets, amortized actuarial gains/losses, the impacts of any plan curtailments/settlements and pension insolvency costs and other costs.

*** 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)   2019

EPS Guidance

Expectations   GAAP Diluted EPS at least $12.45   Operating EPS (non-GAAP) at least $13.90       Adjustments   Acquisition-related Charges * $0.76   Non-Operating Retirement-Related Items $0.45   Tax Reform Enactment Impacts $0.24  

* Includes acquisitions as of March 31, 2019, and pre-closing charges, such as financing costs, associated with the Red Hat acquisition

 

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IBMMelinda Zurich, 914-499-4034melinda.zurich@us.ibm.comJohn Bukovinsky, 732-618-3531jbuko@us.ibm.com