IBM Reports 2016 First-Quarter Earnings

Transformation Progress Continues with Strong Growth in Strategic Imperatives

Highlights

  • Diluted EPS: Operating (non-GAAP) of $2.35; GAAP of $2.09
  • Revenue from continuing operations of $18.7 billion
  • Strategic imperatives revenue of $29.8 billion over the last 12 months represents 37 percent of IBM revenue
  • Cloud revenue of $10.8 billion over the last 12 months
  • For cloud delivered as a service, annual run rate of $5.4 billion in the quarter, up 46 percent adjusting for currency, up 42 percent as reported year to year
  • Free cash flow of $14.3 billion over last 12 months
  • Announced or closed 10 acquisitions during the quarter
  • Returned $2.2 billion to shareholders in the form of gross share repurchases and dividends
  • Maintains full-year operating (non-GAAP) EPS expectations of at least $13.50
  • Improves view of full-year free cash flow

IBM Reports 2016 First-Quarter Earnings

IBM

IBM (NYSE:IBM) today announced first-quarter 2016 earnings results.

"We are pleased with the progress we have made helping our clients apply new cognitive solutions and hybrid cloud platforms," said Ginni Rometty, IBM chairman, president and chief executive officer. "IBM has established itself as the industry leader in total cloud, analytics and cognitive, all of which helped drive our strategic imperatives revenue growth at a strong double-digit rate, substantially faster than the market."

 
        FIRST - QUARTER 2016
       
 
Gross Profit
Diluted EPS     Net Income     Margin
 
Operating (Non-GAAP) $2.35 $2.3B 47.5%
Year/Year         -19%     -21%     -1.8Pts
GAAP from Continuing Operations $2.09 $2.0B 46.5%
Year/Year         -14%     -17%     -1.8Pts
 
Strategic
REVENUE         Total IBM     Imperatives     Cloud
As reported (US$) $18.7B $7.0B $2.6B
Year/Year         -5%     14%     34%
Year/Year adjusting for currency         -2%     17%     36%
 

"In the first quarter, we invested $3.6 billion in acquisitions and capital expenditures, and returned $2.2 billion to shareholders through dividends and gross share repurchases,” said Martin Schroeter, IBM senior vice president and chief financial officer. "We will continue to invest as we transform our operations, expanding our industry expertise and our cognitive and cloud capabilities."

Strategic Imperatives

First-quarter revenues from the company’s strategic imperatives --- cloud, analytics and engagement --- increased 14 percent year to year (up 17 percent adjusting for currency). Total cloud revenues (public, private and hybrid) for the quarter increased 34 percent (up 36 percent adjusting for currency). Cloud revenue over the trailing 12 months was $10.8 billion. The annual exit run rate for cloud delivered as a service -- a subset of the total cloud revenue -- increased to $5.4 billion from $3.8 billion in the first quarter of 2015. Revenues from analytics increased 7 percent (up 9 percent adjusting for currency). Revenues from mobile increased 88 percent (up 93 percent adjusting for currency) and from security increased 18 percent (up 20 percent adjusting for currency).

Full-Year 2016 Expectations

IBM continues to expect full-year 2016 operating (non-GAAP) diluted earnings per share of at least $13.50. The company expects GAAP diluted earnings per share of at least $12.35. The 2016 operating (non-GAAP) earnings expectation excludes $1.15 per share of charges for amortization of purchased intangible assets, other acquisition-related charges and retirement-related charges.

IBM had previously expected a free cash flow realization of GAAP net income which implied a full-year free cash flow range of $11 billion to $12 billion. The company now expects free cash flow to be at the high end of that range at the same base level of operating (non-GAAP) EPS.

Pre-Tax Income and Tax Rate

The decrease in the company’s pre-tax income was primarily the result of increased expenses for workforce transformation, real estate actions, and actions in Latin America, which totaled nearly $1.5 billion.

IBM’s tax rate for the first quarter includes a $1.0 billion refund of previously paid non-U.S. taxes, plus interest, for a total benefit of $1.2 billion. This is the result of a long-standing tax matter which was resolved in the company’s favor in February and was disclosed in the 2015 IBM Annual Report. The impact of the tax refund on the company’s first-quarter net income was largely equivalent on an after-tax basis to the expenses for workforce transformation, real estate actions, and actions in Latin America.

Cash Flow and Balance Sheet

The company generated free cash flow of $2.3 billion in the first quarter, excluding Global Financing receivables, up $1.2 billion year to year. IBM returned $1.2 billion in dividends and $0.9 billion of gross share repurchases to shareholders. At the end of March 2016, IBM had $4.7 billion remaining in the current share repurchase authorization.

IBM ended the first-quarter 2016 with $14.9 billion of cash on hand, an increase of $6.7 billion since year-end 2015. Debt, including Global Financing debt of $26.8 billion, totaled $45.6 billion, compared with $39.9 billion at year-end 2015. Core (non-global financing) debt totaled $18.8 billion, an increase of $6.1 billion since year-end 2015. The balance sheet remains strong and is well positioned to support the business over the long term.

Segment Results

As announced in February during the company’s Investor Briefing, IBM has revised its financial reporting structure to reflect the transformation of the business and provide investors with increased visibility into the company’s operating model by disclosing additional information on its strategic imperatives revenue by segment. Beginning with the first-quarter 2016, IBM’s business segments and results are:

  • Cognitive Solutions (includes solutions software and transaction processing software) -- revenues of $4.0 billion, down 1.7 percent, up 0.4 percent adjusting for currency. Solutions software grew, led by security and analytics solutions, including strong growth in the Watson businesses.
  • Global Business Services (includes consulting, global process services, application management) -- revenues of $4.1 billion, down 4.3 percent, down 2.3 percent adjusting for currency. Strategic imperatives revenue within the segment was up 19 percent (up 22 percent adjusting for currency) and generated nearly one-half of segment revenue.
  • Technology Services and Cloud Platforms (includes infrastructure services, technical support services, integration software) -- revenues of $8.4 billion, down 1.5 percent, up 1.9 percent adjusting for currency. Growth of 41 percent (45 percent adjusting for currency) in strategic imperatives revenue within the segment was driven by hybrid cloud infrastructure engagements.
  • Systems (includes systems hardware and operating systems software) -- revenues of $1.7 billion, down 21.8 percent, down 20.6 percent adjusting for currency. Revenue reflects z Systems product cycle dynamics; segment gross profit margins increased.
  • Global Financing (includes financing and used equipment sales) -- revenues of $410 million, down 11.2 percent, down 6.4 percent adjusting for currency.

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; 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 personnel 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).

The rationale for management’s use of non-GAAP measures is included as part of the supplemental materials presented within the first-quarter earnings materials. These materials are available via a link on the IBM investor relations Web site at www.ibm.com/investor and are being included in Attachment II (“Non-GAAP Supplemental Materials”) to 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/1q16.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,
 
2016     2015*
 
REVENUE
Cognitive Solutions $ 3,979 $ 4,047
Global Business Services 4,131 4,318
Technology Services & Cloud Platforms 8,424 8,554
Systems 1,675 2,142
Global Financing 410 461
Other   66         67  
TOTAL REVENUE 18,684 19,590
 
GROSS PROFIT 8,686 9,452
 
GROSS PROFIT MARGIN
Cognitive Solutions 82.0 % 84.5 %
Global Business Services 25.8 % 27.4 %
Technology Services & Cloud Platforms 40.9 % 42.1 %
Systems 57.2 % 54.8 %
Global Financing 42.4 % 49.6 %
 
TOTAL GROSS PROFIT MARGIN 46.5 % 48.2 %
 
EXPENSE AND OTHER INCOME
S,G&A 6,012 5,362
 
R,D&E 1,458 1,298
 
Intellectual property and
custom development income (217 ) (173 )
 
Other (income) and expense 253 (143 )
 
Interest expense 147 108
       
TOTAL EXPENSE AND OTHER INCOME 7,652 6,451
 
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 1,034 3,001
Pre-tax margin 5.5 % 15.3 %
 
Provision for / (Benefit) from income taxes (983 ) 585
Effective tax rate (95.1 )% 19.5 %
 
INCOME FROM CONTINUING OPERATIONS $ 2,016 $ 2,415
 
DISCONTINUED OPERATIONS
Loss from discontinued operations, net of taxes   (3 )       (88 )
 
NET INCOME $ 2,014       $ 2,328  
 
 
EARNINGS PER SHARE OF COMMON STOCK:
Assuming Dilution
Continuing Operations $ 2.09 $ 2.44
Discontinued Operations $ 0.00         ($0.09 )
TOTAL $ 2.09       $ 2.35  
 
Basic
Continuing Operations $ 2.09 $ 2.45
Discontinued Operations $ 0.00         ($0.09 )
TOTAL $ 2.09       $ 2.36  
 
WEIGHTED-AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING (M's):
Assuming Dilution 964.4 992.3
Basic 961.7 988.1
 
*Reclassified to conform with 2016 presentation.
 
 
INTERNATIONAL BUSINESS MACHINES CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
        At       At
(Dollars in Millions) March 31, December 31,
2016 2015
ASSETS:
 
Current Assets:
Cash and cash equivalents $ 14,354 $ 7,686
Marketable securities 515 508
Notes and accounts receivable - trade, net 8,527 8,333
Short-term financing receivables, net 16,646 19,020
Other accounts receivable, net 1,557 1,201
Inventory 1,690 1,551
Prepaid expenses and other current assets 4,334 4,205
   
Total Current Assets 47,623 42,504
 
Property, plant and equipment, net 10,910 10,727
Long-term financing receivables, net 9,266 10,013
Prepaid pension assets 2,332 1,734
Deferred taxes 4,809 4,822
Goodwill and intangibles, net 38,695 35,508
Investments and sundry assets 5,223 5,187
   
Total Assets $ 118,856   $ 110,495  
 
 
LIABILITIES:
 
Current Liabilities:
Taxes $ 2,203 $ 2,847
Short-term debt 5,303 6,461
Accounts payable 5,302 6,028
Deferred income 12,609 11,021
Other liabilities 9,248 7,913
   
Total Current Liabilities 34,664 34,269
 
Long-term debt 40,254 33,428
Retirement related obligations 16,939 16,504
Deferred income 3,662 3,771
Other liabilities 8,264 8,099
   
Total Liabilities 103,784 96,071
 
 
EQUITY:
 
IBM Stockholders' Equity:
Common stock 53,439 53,262
Retained earnings 146,888 146,124
Treasury stock -- at cost (156,404 ) (155,518 )
Accumulated other comprehensive income/(loss) (28,998 ) (29,607 )
   
Total IBM stockholders' equity 14,925 14,262
 
Noncontrolling interests 147 162
   
Total Equity 15,072 14,424
   
Total Liabilities and Equity $ 118,856   $ 110,495  
 
 
INTERNATIONAL BUSINESS MACHINES CORPORATION
CASH FLOW ANALYSIS
(Unaudited)
             
Three Months Ended
(Dollars in Millions) March 31
 
2016 2015
 
Net Cash from Operating Activities per GAAP: $ 5,645 $ 3,610
 
Less: the change in Global Financing (GF)
Receivables   2,378     1,605  
 
Net Cash from Operating Activities
(Excluding GF Receivables) 3,266 2,004
 
Capital Expenditures, Net (971 ) (923 )
 
Free Cash Flow
(Excluding GF Receivables) 2,295 1,081
 
Acquisitions (2,590 ) (148 )
Divestitures 47 19
Dividends (1,250 ) (1,088 )
Share Repurchase (939 ) (1,165 )
Non-GF Debt 5,871 361
Other (includes GF Receivables, and GF Debt) 3,239 1,266
 
Change in Cash, Cash Equivalents and
Short-term Marketable Securities $ 6,674   $ 327  
 
 
INTERNATIONAL BUSINESS MACHINES CORPORATION
SEGMENT DATA
(Unaudited)
 
        FIRST - QUARTER 2016
 
Cognitive Solutions &            
Industry Services
    Technology
Global Services &
(Dollars in Millions) Cognitive Business Cloud Global
Solutions     Services     Platforms     Systems     Financing
Revenue
External $ 3,979 $ 4,131 $ 8,424 $ 1,675 $ 410
Internal   668         113         165         212         486  
Total Segment Revenue $ 4,647 $ 4,245 $ 8,589 $ 1,888 $ 896
 
Pre-tax Income / (Loss) from Continuing Operations 1,013 190 258 (10 ) 386
 
Pre-tax margin 21.8 % 4.5 % 3.0 % (0.5 )% 43.1 %
 
 
Change YTY Revenue - External (1.7 )% (4.3 )% (1.5 )% (21.8 )% (11.2 )%
Change YTY Revenue - External @constant currency 0.4 % (2.3 )% 1.9 % (20.6 )% (6.4 )%
 
 
 
 
FIRST - QUARTER 2015*
 
Cognitive Solutions &
Industry Services
Technology
Global Services &
(Dollars in Millions) Cognitive Business Cloud Global
Solutions     Services     Platforms     Systems     Financing
Revenue
External $ 4,047 $ 4,318 $ 8,554 $ 2,142 $ 461
Internal   635         131         166         173         586  
Total Segment Revenue $ 4,682 $ 4,449 $ 8,720 $ 2,314 $ 1,048
 
Pre-tax Income / (Loss) from Continuing Operations 1,528 588 1,131 261 515
 
Pre-tax margin 32.6 % 13.2 % 13.0 % 11.3 % 49.2 %
 
* Reclassified to conform with 2016 presentation.
 
 
INTERNATIONAL BUSINESS MACHINES CORPORATION
U.S. GAAP TO OPERATING RESULTS RECONCILIATION
(Unaudited; Dollars in millions except per share amounts)
 
       
FIRST - QUARTER 2016
CONTINUING OPERATIONS
    Acquisition-     Retirement-    
Related Related Operating
GAAP     Adjustments*     Adjustments**     (Non-GAAP)
 
Gross Profit $ 8,686 $ 112 $ 79 $ 8,877
Gross Profit Margin 46.5 % 0.6Pts 0.4Pts 47.5 %
S,G&A 6,012 (67 ) (55 ) 5,890
R,D&E 1,458 - - (9 ) 1,449
Other (Income) & Expense 253 (6 ) - - 247
Total Expense & Other (Income) 7,652 (73 ) (63 ) 7,516
Pre-tax Income from Continuing Operations 1,034 185 142 1,361
Pre-tax Income Margin from Continuing Operations 5.5 % 1.0Pts 0.8Pts 7.3 %
Provision for / (Benefit) from Income Taxes*** (983 ) 47 27 (909 )
Effective Tax Rate (95.1 )% 18.2Pts 13.8Pts (66.8 )%
Income from Continuing Operations 2,016 138 115 2,270
Income Margin from Continuing Operations 10.8 % 0.7Pts 0.6Pts 12.1 %
Diluted Earnings Per Share: Continuing Operations $ 2.09 $ 0.14 $ 0.12 $ 2.35
 
FIRST - QUARTER 2015
CONTINUING OPERATIONS
Acquisition- Retirement-
Related Related Operating
GAAP     Adjustments*     Adjustments**     (Non-GAAP)
 
Gross Profit $ 9,452 $ 91 $ 121 $ 9,664
Gross Profit Margin 48.2 % 0.5Pts 0.6Pts 49.3 %
S,G&A 5,362 (79 ) (308 ) 4,975
R,D&E 1,298 - - (13 ) 1,285
Other (Income) & Expense (143 ) 0 - - (143 )
Total Expense & Other (Income) 6,451 (79 ) (321 ) 6,051
Pre-tax Income from Continuing Operations 3,001 170 442 3,612
Pre-tax Income Margin from Continuing Operations 15.3 % 0.9Pts 2.3Pts 18.4 %
Provision for Income Taxes*** 585 28 109 722
Effective Tax Rate 19.5 % -0.2Pts 0.7Pts 20.0 %
Income from Continuing Operations 2,415 142 333 2,890
Income Margin from Continuing Operations 12.3 % 0.7Pts 1.7Pts 14.8 %
Diluted Earnings Per Share: Continuing Operations $ 2.44 $ 0.14 $ 0.33 $ 2.91
 
 
* 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, multi-employer plans and insolvency insurance.
*** 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.
 

IBM
Ian Colley, 914-434-3043
colley@us.ibm.com
or
John Bukovinsky, 732- 618-3531
jbuko@us.ibm.com

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