Ibm Regulatory News (IBM)

18 Apr 2018 07:00

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

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

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