IBM Reports 2018 Third-Quarter Results

IBM (NYSE:IBM)

Best Year-to-Year Gross Margin Performance in 3 Years, Reflecting Higher Value Business

Highlights

  • GAAP EPS from continuing operations of $2.94; Operating (non-GAAP) EPS of $3.42
  • Revenue of $18.8 billion, down 2 percent (flat adjusting for currency)
  • Strategic imperatives revenue of $39.5 billion over last 12 months, up 13 percent (up 11 percent adjusting for currency)
  • Cloud revenue of $19.0 billion over last 12 months, up 20 percent (up 18 percent adjusting for currency)
  • As-a-service annual exit run rate for cloud revenue of $11.4 billion in the quarter, up 21 percent year to year (up 24 percent adjusting for currency)
  • Strong services gross profit margin expansion year to year
  • Maintains full-year operating (non-GAAP) EPS and free cash flow expectations

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

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“IBM’s progress and momentum this year in the emerging, high-value segments of the IT industry are driven by our innovative technology, deep industry expertise and commitment to trust and security,” said Ginni Rometty, IBM chairman, president and chief executive officer. “Our leadership in the technology and services that deliver hybrid cloud, AI, blockchain, analytics and security has helped drive our overall performance, and is helping our clients unleash the full business value of these innovations.”

THIRD QUARTER 2018
Pre-taxGross
DilutedNetPre-taxIncomeProfit
EPSIncomeIncomeMarginMargin
GAAP from Continuing Operations$2.94$2.7B$3.0B16.0%46.9%
Year/Year1%-1%-2%0.0Pts0.0Pts
Operating (Non-GAAP)$3.42$3.1B$3.6B19.2%47.4%
Year/Year5%3%1%0.5Pts0.0Pts

“In the quarter, we again expanded our overall operating pre-tax income margin year to year, and produced our strongest year-to-year gross margin performance in three years,” said James Kavanaugh, IBM senior vice president and chief financial officer. “At the same time, with our strong cash generation, we increased our capital investment in the business through the first three quarters and continued to return capital to shareholders.”

Strategic Imperatives Revenue

Strategic imperatives revenue over the last 12 months was $39.5 billion, up 13 percent (up 11 percent adjusting for currency). Total cloud revenue over the last 12 months was $19.0 billion, up 20 percent (up 18 percent adjusting for currency), with $8.1 billion from hardware, software and services to enable IBM clients to implement hybrid cloud solutions across public, private and multi-cloud environments, and $10.9 billion delivered as a service. The annual exit run rate for as-a-service revenue increased in the quarter to $11.4 billion, up 21 percent (up 24 percent adjusting for currency).

Cash Flow and Balance Sheet

In the third quarter, the company generated net cash from operating activities of $4.2 billion, or $3.1 billion, excluding Global Financing receivables. IBMs free cash flow was $2.2 billion. IBM returned $2.1 billion to shareholders through $1.4 billion in dividends and $0.6 billion in gross share repurchases. At the end of September 2018, IBM had $1.4 billion remaining in the current share repurchase authorization.

IBM ended the third quarter with $14.7 billion of cash on hand. Debt totaled $46.9 billion, including Global Financing debt of $30.4 billion. The balance sheet remains strong and is well positioned for the long term.

Segment Results for Third Quarter

  • Cognitive Solutions (includes solutions software and transaction processing software) — revenues of $4.1 billion, down 6 percent (down 5 percent adjusting for currency), with growth in Watson health, security solutions, and key strategic areas in analytics.
  • Global Business Services (includes consulting, application management and global process services) — revenues of $4.1 billion, up 1 percent (up 3 percent adjusting for currency), led by consulting. Gross profit margin increased 270 basis points.
  • Technology Services & Cloud Platforms (includes infrastructure services, technical support services and integration software) — revenues of $8.3 billion, down 2 percent (flat year to year adjusting for currency), with growth in cloud revenue. Gross profit margin increased 120 basis points.
  • Systems (includes systems hardware and operating systems software) — revenues of $1.7 billion, up 1 percent (up 2 percent adjusting for currency), driven by growth in Power and IBM Z.
  • Global Financing (includes financing and used equipment sales) — revenues of $388 million, down 9 percent (down 7 percent adjusting for currency).

Full-Year 2018 Expectations

The company expects operating (non-GAAP) diluted earnings per share of at least $13.80, and GAAP diluted earnings per share of at least $11.60. Operating (non-GAAP) diluted earnings per share exclude $2.20 per share of charges for amortization of purchased intangible assets, other acquisition-related charges, retirement-related charges and any one-time impacts from the enactment of U.S. Tax Reform. GAAP expectations exclude any fourth-quarter one-time impacts from the enactment of U.S. Tax Reform.

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

Year-To-Date 2018 Results

Consolidated diluted earnings per share from continuing operations was $7.36 compared to $7.24, up 2 percent year to year. Consolidated net income was $6.8 billion, flat year to year. Revenues for the nine-month period totaled $57.8 billion, an increase of 2 percent year to year (flat year to year adjusting for currency), compared with $56.6 billion for the first nine months of 2017.

Operating (non-GAAP) diluted earnings per share from continuing operations was $8.96 compared with $8.54 per diluted share for the 2017 period, an increase of 5 percent. Operating (non-GAAP) net income for the nine months ended September 30, 2018 was $8.2 billion compared with $8.0 billion in the year-ago period, an increase of 3 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 companys 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 companys failure to meet growth and productivity objectives; a failure of the companys innovation initiatives; damage to the companys reputation; risks from investing in growth opportunities; failure of the companys 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 companys pension plans; ineffective internal controls; the companys use of accounting estimates; the companys 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 companys 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 companys Form 10-Qs, Form 10-K and in the companys 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 companys 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 managements 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

IBMs 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/3q18.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 EndedNine Months Ended
September 30,September 30,
2018201720182017
REVENUE
Cognitive Solutions$4,148$4,400$13,027$13,021
Global Business Services4,1304,09312,49512,196
Technology Services & Cloud Platforms8,2928,45725,53325,079
Systems1,7361,7215,4124,863
Global Financing3884271,1881,246
Other6256176192
TOTAL REVENUE18,75619,15357,83056,597
GROSS PROFIT8,8038,981*26,24925,894*
GROSS PROFIT MARGIN
Cognitive Solutions76.0%78.7%*76.7%78.3%*
Global Business Services29.8%27.1%*26.3%25.1%*
Technology Services & Cloud Platforms42.1%40.9%*39.9%40.1%*
Systems52.7%53.6%*49.3%51.5%*
Global Financing26.3%25.2%*29.1%29.2%*
TOTAL GROSS PROFIT MARGIN46.9%46.9%*45.4%45.8%*
EXPENSE AND OTHER INCOME
S,G&A4,3634,606*14,66514,666*
R,D&E1,2521,291*4,0214,212*
Intellectual property and
custom development income(275)(308)(842)(1,118)
Other (income) and expense275159*968751*
Interest expense191168530451
TOTAL EXPENSE AND OTHER INCOME5,8075,917*19,34118,962*
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES2,9963,0656,9086,931
Pre-tax margin16.0%16.0%11.9%12.2%
Provision for income taxes304339138120
Effective tax rate10.2%11.0%2.0%1.7%
INCOME FROM CONTINUING OPERATIONS$2,692$2,726$6,770$6,811
DISCONTINUED OPERATIONS
Income/(Loss) from discontinued operations, net of taxes207(3)
NET INCOME$2,694$2,726$6,777$6,807
EARNINGS PER SHARE OF COMMON STOCK:
Assuming Dilution
Continuing Operations$2.94$2.92$7.36$7.24
Discontinued Operations$0.00$0.00$0.01$0.00
TOTAL$2.94$2.92$7.37$7.24
Basic
Continuing Operations$2.95$2.93$7.39$7.28
Discontinued Operations$0.00$0.00$0.01$0.00
TOTAL$2.95$2.93$7.40$7.28
WEIGHTED-AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING (M’s):
Assuming Dilution915.2933.2920.0940.2
Basic911.2929.4915.6935.6
* Recast to reflect adoption of the FASB guidance on presentation of net postretirement benefit cost.
INTERNATIONAL BUSINESS MACHINES CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
AtAt
(Dollars in Millions)September 30,December 31,
20182017
ASSETS:
Current Assets:
Cash and cash equivalents$11,563$11,972
Restricted cash168262*
Marketable securities2,932608
Notes and accounts receivable – trade, net7,0718,928
Short-term financing receivables, net19,24921,721
Other accounts receivable, net767981
Inventory1,8931,583
Deferred Costs2,2271,820**
Prepaid expenses and other current assets2,3881,860* **
Total Current Assets48,25749,735
Property, plant and equipment, net10,94911,116
Long-term financing receivables, net8,1799,550
Prepaid pension assets5,6554,643
Deferred costs2,5812,136**
Deferred taxes4,4364,862
Goodwill and intangibles, net39,66040,531
Investments and sundry assets2,2722,783**
Total Assets$121,990$125,356
LIABILITIES:
Current Liabilities:
Taxes$2,502$4,219
Short-term debt10,9326,987
Accounts payable5,3846,451
Deferred income10,70411,552
Other liabilities7,3008,153
Total Current Liabilities36,82237,363
Long-term debt35,98939,837
Retirement related obligations15,77416,720
Deferred income3,5073,746
Other liabilities9,9799,965
Total Liabilities102,071107,631
EQUITY:
IBM Stockholders’ Equity:
Common stock54,98754,566
Retained earnings158,612153,126
Treasury stock — at cost(165,995)(163,507)
Accumulated other comprehensive income/(loss)(27,820)(26,592)
Total IBM Stockholders’ Equity19,78417,594
Noncontrolling interests134131
Total Equity19,91817,725
Total Liabilities and Equity$121,990$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 EndedNine Months Ended
(Dollars in Millions)September 30,September 30,
2018201720182017
Net Cash Provided by Operating Activities per GAAP:$4,232$3,570$11,128$10,991
Less: change in Global Financing (GF) Receivables1,0962582,8742,468
Capital Expenditures, Net(942)(780)(2,839)(2,347)
Free Cash Flow2,1942,5325,4156,176
Acquisitions(1)(274)(123)(442)
Divestitures635
Dividends(1,431)(1,396)(4,250)(4,119)
Share Repurchase(627)(949)(2,393)(3,674)
Non-GF Debt2,218(467)1,6071,896
Other (includes GF Net Receivables and GF Debt)382(216)*1,5643,124*
Change in Cash, Cash Equivalents, Restricted Cash
and Short-term Marketable Securities$2,736($763)*$1,820$2,995*
* Recast to reflect adoption of the FASB guidance on restricted cash.
INTERNATIONAL BUSINESS MACHINES CORPORATION
CASH FLOW
(Unaudited)
Three Months EndedNine Months Ended
(Dollars in Millions)September 30,September 30,
2018201720182017
Net Income from Operations$2,694$2,726$6,777$6,807
Depreciation/Amortization of Intangibles1,1381,1753,3683,392
Stock-based Compensation129123371388
Working Capital / Other(825)(713)(2,261)(2,064)
Global Financing A/R1,0962582,8742,468
Net Cash Provided by Operating Activities$4,232$3,570$11,128$10,991
Capital Expenditures, net of payments & proceeds(942)(780)(2,839)(2,347)
Divestitures, net of cash transferred635
Acquisitions, net of cash acquired(1)(274)(123)(442)
Marketable Securities / Other Investments, net(2,026)(858)*(2,406)(517)*
Net Cash Used in Investing Activities($2,969)($1,906)*($5,368)($3,271)*
Debt, net of payments & proceeds1,595(446)8452,310
Dividends(1,431)(1,396)(4,250)(4,119)
Common Stock Repurchases(627)(949)(2,393)(3,674)
Common Stock Transactions – Other2635(66)(15)
Net Cash Used in Financing Activities($437)($2,756)($5,864)($5,499)
Effect of Exchange Rate changes on Cash(55)328(399)875
Net Change in Cash, Cash Equivalents and Restricted Cash$771($764)*($503)$3,096*
* Recast to reflect adoption of the FASB guidance on restricted cash.
INTERNATIONAL BUSINESS MACHINES CORPORATION
SEGMENT DATA
(Unaudited)

THIRD – QUARTER 2018

Technology
GlobalServices &
(Dollars in Millions)CognitiveBusinessCloudGlobal
SolutionsServicesPlatformsSystemsFinancing
Revenue
External$4,148$4,130$8,292$1,736$388
Internal63977240181338
Total Segment Revenue$4,787$4,207$8,533$1,917$726
Pre-tax Income from Continuing Operations1,6295791,075209308
Pre-tax margin34.0%13.8%12.6%10.9%42.5%
Change YTY Revenue – External(5.7)%0.9%(1.9)%0.9%(9.0)%
Change YTY Revenue – External @constant currency(4.6)%2.5%0.2%1.8%(7.1)%

THIRD – QUARTER 2017

Technology
GlobalServices &
(Dollars in Millions)CognitiveBusinessCloudGlobal
SolutionsServicesPlatformsSystemsFinancing
Revenue
External$4,400$4,093$8,457$1,721$427
Internal62992164227272
Total Segment Revenue$5,030$4,185$8,621$1,948$698
Pre-tax Income from Continuing Operations *1,6434421,177337243
Pre-tax margin *32.7%10.6%13.7%17.3%34.8%
* Recast to reflect adoption of the FASB guidance on presentation of net postretirement benefit cost.
INTERNATIONAL BUSINESS MACHINES CORPORATION
SEGMENT DATA
(Unaudited)
NINE – MONTHS 2018
Technology
GlobalServices &
(Dollars in Millions)CognitiveBusinessCloudGlobal
SolutionsServicesPlatformsSystemsFinancing
Revenue
External$13,027$12,495$25,533$5,412$1,188
Internal2,1222495505761,240
Total Segment Revenue$15,149$12,744$26,083$5,989$2,428
Pre-tax Income from Continuing Operations4,7181,1092,3953521,042
Pre-tax margin31.1%8.7%9.2%5.9%42.9%
Change YTY Revenue – External0.0%2.4%1.8%11.3%(4.7)%
Change YTY Revenue – External @constant currency(1.4)%0.5%(0.1)%9.9%(5.8)%
NINE – MONTHS 2017
Technology
GlobalServices &
(Dollars in Millions)CognitiveBusinessCloudGlobal
SolutionsServicesPlatformsSystemsFinancing
Revenue
External$13,021$12,196$25,079$4,863$1,246
Internal2,001271497571925
Total Segment Revenue$15,022$12,467$25,576$5,434$2,171
Pre-tax Income from Continuing Operations *4,5221,0352,845222835
Pre-tax margin *30.1%8.3%11.1%4.1%38.5%
* Recast to reflect adoption of the FASB guidance on presentation of net postretirement benefit cost.
INTERNATIONAL BUSINESS MACHINES CORPORATION
U.S. GAAP TO OPERATING (Non-GAAP) RESULTS RECONCILIATION
(Unaudited; Dollars in millions except per share amounts)
THIRD – QUARTER 2018
CONTINUING OPERATIONS
Acquisition-Retirement-Tax Reform
RelatedRelatedOne-TimeOperating
GAAPAdjustments*Adjustments**Impact(Non-GAAP)
Gross Profit$8,803$96$8,899
Gross Profit Margin46.9%0.5Pts47.4%
S,G&A4,363(112)4,251
R,D&E1,2521,252
Other (Income) & Expense275(1)(389)(115)
Total Expense & Other (Income)5,807(113)(389)5,304
Pre-tax Income from Continuing Operations2,9962093893,594
Pre-tax Income Margin from Continuing Operations16.0%1.1Pts2.1Pts19.2%
Provision for Income Taxes***30456100460
Effective Tax Rate10.2%1.0Pts1.7Pts12.8%
Income from Continuing Operations2,6921532893,134
Income Margin from Continuing Operations14.4%0.8Pts1.5Pts16.7%
Diluted Earnings Per Share: Continuing Operations$2.94$0.17$0.31$3.42
THIRD – QUARTER 2017
CONTINUING OPERATIONS
Acquisition-Retirement-
RelatedRelatedOperating
GAAPAdjustments*Adjustments**(Non-GAAP)
Gross Profit$8,981$114$9,095
Gross Profit Margin46.9%0.6Pts47.5%
S,G&A4,606(125)4,482
R,D&E1,2911,291
Other (Income) & Expense159(273)(114)
Total Expense & Other (Income)5,917(125)(273)5,519
Pre-tax Income from Continuing Operations3,0652382733,576
Pre-tax Income Margin from Continuing Operations16.0%1.2Pts1.4Pts18.7%
Provision for Income Taxes***33979113531
Effective Tax Rate11.0%1.5Pts2.3Pts14.8%
Income from Continuing Operations2,7261591603,045
Income Margin from Continuing Operations14.2%0.8Pts0.8Pts15.9%
Diluted Earnings Per Share: Continuing Operations$2.92$0.17$0.17$3.26

* 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. 2017 adjustments were recast to reflect the adoption of the FASB guidance on net postretirement 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
U.S. GAAP TO OPERATING (Non-GAAP) RESULTS RECONCILIATION
(Unaudited; Dollars in millions except per share amounts)
NINE – MONTHS 2018
CONTINUING OPERATIONS
Acquisition-Retirement-Tax Reform
RelatedRelatedOne-TimeOperating
GAAPAdjustments*Adjustments**Impact(Non-GAAP)
Gross Profit$26,249$283$26,531
Gross Profit Margin45.4%0.5Pts45.9%
S,G&A14,665(332)14,333
R,D&E4,0214,021
Other (Income) & Expense968(1)(1,185)(219)
Total Expense & Other (Income)19,341(333)(1,185)17,822
Pre-tax Income from Continuing Operations6,9086161,1858,709
Pre-tax Income Margin from Continuing Operations11.9%1.1Pts2.0Pts15.1%
Provision for Income Taxes***138138285(93)468
Effective Tax Rate2.0%1.4Pts3.0Pts(1.1)Pts5.4%
Income from Continuing Operations6,770478900938,241
Income Margin from Continuing Operations11.7%0.8Pts1.6Pts0.2Pts14.2%
Diluted Earnings Per Share: Continuing Operations$7.36$0.52$0.98$0.10$8.96
NINE – MONTHS 2017
CONTINUING OPERATIONS
Acquisition-Retirement-
RelatedRelatedOperating
GAAPAdjustments*Adjustments**(Non-GAAP)
Gross Profit$25,894$349$26,243
Gross Profit Margin45.8%0.6Pts46.4%
S,G&A14,666(393)14,273
R,D&E4,2124,212
Other (Income) & Expense751(7)(969)(225)
Total Expense & Other (Income)18,962(401)(969)17,593
Pre-Tax Income from Continuing Operations6,9317509698,650
Pre-tax Income Margin from Continuing Operations12.2%1.3Pts1.7Pts15.3%
Provision for Income Taxes***120212288621
Effective Tax Rate1.7%2.3Pts3.1Pts7.2%
Income from Continuing Operations6,8115376818,030
Income Margin from Continuing Operations12.0%0.9Pts1.2Pts14.2%
Diluted Earnings Per Share: Continuing Operations$7.24$0.57$0.73$8.54

* 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. 2017 adjustments were recast to reflect the adoption of the FASB guidance on net postretirement 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 EPSat least $11.60
Operating EPS (non-GAAP)at least $13.80
Adjustments
Acquisition-related Charges *$0.78
Non-Operating Retirement-Related Items$1.32
Year-to-Date Tax Reform One-time Charge$0.10
* Includes acquisitions as of September 30, 2018

IBM
Ian Colley, 914-434-3043
[email protected]
or
John
Bukovinsky, 732-618-3531
[email protected]