IBM
International Business Machines
$154.00
$.09
.06%
IBM Reports 2017 First-Quarter Results
Tuesday, April 18, 2017  4:06:00 PM ET

IBM (IBM)

Continued Strong Growth in Strategic Imperatives Led by IBM Cloud

Highlights

Diluted EPS from continuing operations: GAAP of $1.85; Operating (non-GAAP) of $2.38

Revenue from continuing operations of $18.2 billion

Strategic imperatives revenue of $7.8 billion in the quarter, up 12 percent (up 13 percent adjusting for currency)

Strategic imperatives revenue of $33.6 billion over the last 12 months represents 42 percent of IBM revenue

Cloud revenue of $14.6 billion over the last 12 months -- Cloud as-a-Service annual exit run rate of $8.6 billion in the quarter, up 59 percent year to year (up 61 percent adjusting for currency)

Maintains full-year EPS and free cash flow expectations.

IBM (IBM) today announced first-quarter earnings results.

"In the first quarter, both the IBM Cloud and our cognitive solutions again grew strongly, which fueled robust performance in our strategic imperatives," said Ginni Rometty, IBM chairman, president and chief executive officer. "In addition, we are developing and bringing to market emerging technologies such as blockchain and quantum, revolutionizing how enterprises will tackle complex business problems in the years ahead."

FIRST QUARTER 2017
Gross Profit
Diluted EPS
Net Income
Margin
GAAP from Continuing Operations
$1.85
$1.8B
42.8%
Year/Year
-11%
-13%
-3.7Pts
Operating (Non-GAAP)
$2.38
$2.3B
44.5%
Year/Year
1%
-1%
-3.0Pts
Strategic
REVENUE
Total IBM
Imperatives
Cloud
As reported (US$)
$18.2B
$7.8B
$3.5B
Year/Year
-3%
12%
33%
Year/Year adjusting for currency
-2%
13%
35%

"We continued to make investments in the first quarter to expand our cognitive and cloud platform and we increased our research and development spending," said Martin Schroeter, IBM senior vice president and chief financial officer. "At the same time we returned more than $2.6 billion to shareholders through dividends and gross share repurchases."

Strategic Imperatives

First-quarter cloud revenues increased 33 percent (up 35 percent adjusting for currency) to $3.5 billion. Cloud revenue over the last 12 months was $14.6 billion. The annual exit run rate for cloud as-a-service revenue increased to $8.6 billion from $5.4 billion in the first quarter of 2016. Revenues from analytics increased 6 percent (up 7 percent adjusting for currency). Revenues from mobile increased 20 percent (up 22 percent adjusting for currency) and revenues from security increased 9 percent (up 10 percent adjusting for currency).

Full-Year 2017 Expectations

The company continues to expect operating (non-GAAP) diluted earnings per share of at least $13.80 and GAAP diluted earnings per share of at least $11.95. Operating (non-GAAP) diluted earnings per share exclude $1.85 per share of charges for amortization of purchased intangible assets, other acquisition-related charges and retirement-related charges. IBM continues to expect free cash flow to be relatively flat year to year.

Cash Flow and Balance Sheet

In the first quarter, the company generated net cash from operating activities of $4.0 billion, or $1.9 billion excluding Global Financing receivables. IBM’s free cash flow was $1.1 billion, down year to year consistent with the amount of the Japan tax refund received in the first quarter of 2016. IBM returned $1.3 billion in dividends and $1.3 billion of gross share repurchases to shareholders. At the end of March 2017, IBM had $3.8 billion remaining in the current share repurchase authorization.

IBM ended the first quarter of 2017 with $10.7 billion of cash on hand. Debt, including Global Financing debt of $28.5 billion, totaled $42.8 billion. Core (non-Global Financing) debt totaled $14.3 billion. The balance sheet remains strong and is well positioned to support the business over the long term.

Segment Results for First Quarter

Cognitive Solutions (includes Solutions Software and Transaction Processing Software) -- revenues of $4.1 billion, up 2.1 percent (up 2.8 percent adjusting for currency) were driven by growth in analytics and security, which include Watson-related offerings.

Global Business Services (includes Consulting, Global Process Services and Application Management) -- revenues of $4.0 billion, down 3.0 percent (down 1.9 percent adjusting for currency). Strategic imperatives grew double digits led by the cloud and mobile practices.

Technology Services & Cloud Platforms (includes Infrastructure Services, Technical Support Services and Integration Software) -- revenues of $8.2 billion, down 2.5 percent (down 2.0 percent adjusting for currency) with strong growth in strategic imperatives driven by hybrid cloud services.

Systems (includes Systems Hardware and Operating Systems Software) -- revenues of $1.4 billion, down 16.8 percent (down 16.1 percent adjusting for currency).

Global Financing (includes financing and used equipment sales) -- revenues of $405 million, down 1.2 percent (down 2.1 percent adjusting for currency).

Tax Rate

For the first quarter, IBM’s ongoing effective GAAP tax rate was approximately 12 percent. The ongoing effective operating (non-GAAP) tax rate was approximately 15 percent, which is within the expected range of 15 percent plus or minus 3 points provided earlier this year. IBM’s reported tax rates include the effect from a discrete tax benefit disclosed earlier this year.

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).

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/1q17.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,
2017
2016
REVENUE
Cognitive Solutions
$
4,062
$
3,979
Global Business Services
4,006
4,131
Technology Services & Cloud Platforms
8,216
8,424
Systems
1,395
1,675
Global Financing
405
410
Other
71
66
TOTAL REVENUE
18,155
18,684
GROSS PROFIT
7,772
8,686
GROSS PROFIT MARGIN
Cognitive Solutions
77.3 %
82.0 %
Global Business Services
23.6 %
25.8 %
Technology Services & Cloud Platforms
38.9 %
40.9 %
Systems
47.5 %
57.2 %
Global Financing
31.8 %
42.4 %
TOTAL GROSS PROFIT MARGIN
42.8 %
46.5 %
EXPENSE AND OTHER INCOME
S,G&A
5,152
6,012
R,D&E
1,533
1,458
Intellectual property and
custom development income
(445 )
(217 )
Other (income) and expense
(28 )
253
Interest expense
135
147
TOTAL EXPENSE AND OTHER INCOME
6,348
7,652
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES
1,424
1,034
Pre-tax margin
7.8 %
5.5 %
Provision for / (Benefit) from income taxes
(329 )
(983 )
Effective tax rate
-23.1 %
*
-95.1 %
INCOME FROM CONTINUING OPERATIONS
$
1,753
$
2,016
DISCONTINUED OPERATIONS
Income/(Loss) from discontinued operations, net of taxes
(3 )
(3 )
NET INCOME
$
1,750
$
2,014
EARNINGS PER SHARE OF COMMON STOCK:
Assuming Dilution
Continuing Operations
$
1.85
$
2.09
Discontinued Operations
$
0.00
$
0.00
TOTAL
$
1.85
$
2.09
Basic
Continuing Operations
$
1.86
$
2.09
Discontinued Operations
$
0.00
$
0.00
TOTAL
$
1.86
$
2.09
WEIGHTED-AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING (M’s):
Assuming Dilution
947.8
964.4
Basic
942.4
961.7
* Reflects adoption of the FASB guidance on intra-entity
transfers of assets
INTERNATIONAL BUSINESS MACHINES CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
At
At
(Dollars in Millions)
March 31,
December 31,
2017
2016
ASSETS:
Current Assets:
Cash and cash equivalents
$
10,096
$
7,826
Marketable securities
599
701
Notes and accounts receivable - trade, net
8,377
9,182
Short-term financing receivables, net
16,362
19,006
Other accounts receivable, net
1,130
1,057
Inventory
1,609
1,553
Prepaid expenses and other current assets
4,715
4,564
Total Current Assets
42,889
43,888
Property, plant and equipment, net
10,865
10,830
Long-term financing receivables, net
8,502
9,021
Prepaid pension assets
3,491
3,034
Deferred taxes
6,457
5,224
Goodwill and intangibles, net
40,743
40,887
Investments and sundry assets
4,549
4,585
Total Assets
$
117,495
$
117,470
LIABILITIES:
Current Liabilities:
Taxes
$
2,747
$
3,235
Short-term debt
8,340
7,513
Accounts payable
5,324
6,209
Deferred income
12,351
11,035
Other liabilities
7,719
8,283
Total Current Liabilities
36,481
36,275
Long-term debt
34,441
34,655
Retirement related obligations
16,967
17,070
Deferred income
3,557
3,600
Other liabilities
7,601
7,477
Total Liabilities
99,047
99,078
EQUITY:
IBM Stockholders’ Equity:
Common stock
54,104
53,935
Retained earnings
153,292
152,759
Treasury stock -- at cost
(160,359 )
(159,050 )
Accumulated other comprehensive income/(loss)
(28,710 )
(29,398 )
Total IBM stockholders’ equity
18,327
18,246
Noncontrolling interests
121
146
Total Equity
18,448
18,392
Total Liabilities and Equity
$
117,495
$
117,470
INTERNATIONAL BUSINESS MACHINES CORPORATION
CASH FLOW ANALYSIS
(Unaudited)
Three Months Ended
(Dollars in Millions)
March 31,
2017
2016
Net Cash Provided by Operating Activities per GAAP:
$
3,955
$
5,530
* **
Less: change in Global Financing (GF)
Receivables
2,047
2,236
*
Capital Expenditures, Net
(819 )
(971 )
Free Cash Flow
1,088
2,323
**
Acquisitions
(109 )
(2,590 )
Divestitures
(1 )
47
Dividends
(1,321 )
(1,250 )
Share Repurchase
(1,293 )
(939 )
Non-GF Debt
244
5,871
Other (includes GF Receivables and GF Debt)
3,560
3,212
**
Change in Cash, Cash Equivalents and
Short-term Marketable Securities
$
2,168
$
6,674
* Revised classification of certain financing receivables
** Reclassified to reflect adoption of the FASB guidance on
stock-based compensation
INTERNATIONAL BUSINESS MACHINES CORPORATION
CASH FLOW
(Unaudited)
Three Months Ended
(Dollars in Millions)
March 31,
2017
2016
Net Income from Operations
$
1,750
$
2,014
Depreciation/Amortization of Intangibles
1,098
1,025
Stock-based Compensation
129
133
Working Capital / Other
(1,070 )
123
**
Global Financing A/R
2,047
2,236
*
Net Cash Provided by Operating Activities
$
3,955
$
5,530
* **
Capital Expenditures, net of payments & proceeds
(819 )
(971 )
Divestitures, net of cash transferred
(1 )
47
Acquisitions, net of cash acquired
(109 )
(2,590 )
Marketable Securities / Other Investments, net
1,278
1,628
*
Net Cash Used in Investing Activities
$
350
($1,886 ) *
Debt, net of payments & proceeds
476
4,963
Dividends
(1,321 )
(1,250 )
Common Stock Repurchases
(1,293 )
(939 )
Common Stock Transactions - Other
4
32
**
Net Cash Used in Financing Activities
($2,134 )
$
2,806
**
Effect of Exchange Rate changes on Cash
100
217
Net Change in Cash & Cash Equivalents
$
2,270
$
6,668
* Revised classification of certain financing receivables
** Reclassified to reflect adoption of the FASB guidance on
stock-based compensation
INTERNATIONAL BUSINESS MACHINES CORPORATION
SEGMENT DATA
(Unaudited)
FIRST - QUARTER 2017
Cognitive Solutions &
Industry Services
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
1,274
291
687
(186 )
311
Pre-tax margin
26.7 %
7.1 %
8.2 %
(11.9 )%
40.5 %
Change YTY Revenue - External
2.1 %
(3.0 )%
(2.5 )%
(16.8 )%
(1.2 )%
Change YTY Revenue - External @constant currency
2.8 %
(1.9 )%
(2.0 )%
(16.1 )%
(2.1 )%
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 from Continuing Operations
1,013
190
258
(10 )
386
Pre-tax margin
21.8 %
4.5 %
3.0 %
(0.5 )%
43.1 %
INTERNATIONAL BUSINESS MACHINES CORPORATION
U.S. GAAP TO OPERATING (Non-GAAP) RESULTS RECONCILIATION
(Unaudited; Dollars in millions except per share amounts)
FIRST - QUARTER 2017
CONTINUING OPERATIONS
Acquisition-
Retirement-
Related
Related
Operating
GAAP
Adjustments*
Adjustments**
(Non-GAAP)
Gross Profit
$ 7,772
$
119
$
193
$
8,083
Gross Profit Margin
42.8 %
0.7Pts
1.1Pts
44.5 %
S,G&A
5,152
(139 )
(136 )
4,877
R,D&E
1,533
-
(49 )
1,484
Other (Income) & Expense
(28 )
(4 )
-
(31 )
Total Expense & Other (Income)
6,348
(143 )
(185 )
6,020
Pre-tax Income from Continuing Operations
1,424
262
378
2,063
Pre-tax Income Margin from Continuing Operations
7.8 %
1.4Pts
2.1Pts
11.4 %
Provision for / (Benefit) from Income Taxes***
(329 )
67
70
(192 )
Effective Tax Rate
(23.1 )%
7.6Pts
8.7Pts
(9.3 )%
Income from Continuing Operations
1,753
195
308
2,255
Income Margin from Continuing Operations
9.7 %
1.1Pts
1.7Pts
12.4 %
Diluted Earnings Per Share: Continuing Operations
$
1.85
$ 0.21
$ 0.32
$
2.38
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
* 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.
INTERNATIONAL BUSINESS MACHINES CORPORATION
RECONCILIATION OF OPERATING EARNINGS PER SHARE
(Unaudited)
2017
EPS Guidance
Expectations
IBM GAAP EPS
at least $11.95
IBM Operating EPS (non-GAAP)
at least $13.80
Adjustments
Acquisition related charges *
$0.75
Non-Operating Retirement-Related Items
$1.10
* Includes acquisitions through March 31, 2017

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