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IBM Reports 2019 Third-Quarter Results

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Strong Performance by Red Hat Accelerates Cloud Revenue Growth

Highlights

Third Quarter:

  • GAAP EPS from continuing operations of $1.87
  • Operating (non-GAAP) EPS of $2.68
  • Net cash from operating activities of $15.4 billion and free cash flow of $12.3 billion, over the last 12 months
  • Debt reduced by $6.7 billion since the end of second quarter
  • Revenue of $18.0 billion, down 3.9 percent (down 0.6 percent adjusting for divested businesses and currency)
  • Revenue for Red Hat, up 19 percent (up 20 percent adjusting for currency), normalized for historical comparability
  • Revenue growth in Cloud & Cognitive Software and Global Business Services segments
    -- Cloud & Cognitive Software up 6 percent (up 8 percent adjusting for currency)
    --   Global Business Services up 1 percent (up 2 percent adjusting for currency)
  • Cloud revenue of $5.0 billion in the third quarter, up 11 percent (up 14 percent adjusting for divested businesses and currency)
    --   Cloud revenue of $20.0 billion over the last 12 months

2019 Full-year Expectations:

  • GAAP EPS of at least $10.58; maintains operating (non-GAAP) EPS of at least $12.80
  • Maintains free cash flow of approximately $12 billion
     

IBM today announced third-quarter results.

“In the third quarter, as we continued to help clients with their digital reinventions, we grew revenue in our Cloud & Cognitive Software segment and in Global Business Services," said Ginni Rometty, IBM chairman, president and chief executive officer.  "Our results demonstrate that clients see IBM and Red Hat as a powerful combination and they trust us to provide them with the open hybrid cloud technology, innovation and industry expertise to help them shift their mission-critical workloads to the cloud.”

 

THIRD QUARTER 2019
Results Reflect the Impact of Items Related to
the Red Hat Acquisition Closed in July 2019

 


Diluted 
EPS

 


Net
Income

 


Pre-tax
Income

 

Pre-tax
Income
Margin

 

Gross
Profit
Margin

GAAP from Continuing Operations

 $1.87

 

$1.7B

 

$1.5B

 

8.4%

 

46.2%

Year/Year

 (36)%

 

(38)%

 

(49)%

 

(7.5)Pts

 

(0.7)Pts

Operating (Non-GAAP)

$2.68  

$2.4B

 

$2.4B

 

13.3%

 

47.4%

Year/Year

(22)%

 

(24)%

 

(33)%

 

(5.9)Pts

 

(0.0)Pts

“We continued our focus on the strength of our balance sheet in the third quarter," said James Kavanaugh, IBM senior vice president and chief financial officer.  "We generated $12.3 billion in free cash flow over the last 12 months and with our disciplined financial management we reduced debt by nearly $7 billion in the quarter, while maintaining a strong cash balance.”

Cash Flow and Balance Sheet

In the third quarter, the company generated net cash from operating activities of $3.6 billion, or $2.5 billion excluding Global Financing receivables.  IBM’s free cash flow was $1.8 billion.  IBM returned $1.6 billion to shareholders through $1.4 billion in dividends and $0.1 billion in gross share repurchases.  The company suspended its share repurchase program on July 9.

IBM ended the third quarter with $11.0 billion of cash on hand.  Debt, including Global Financing debt of $23.1 billion, totaled $66.3 billion – down $6.7 billion since the end of the second quarter.

Segment Results for Third Quarter

  • Cloud & Cognitive Software (includes cloud and data platforms which includes Red Hat; cognitive applications; and transaction processing platforms) — revenues of $5.3 billion, up 6.4 percent (up 7.8 percent adjusting for currency), led by security, IoT, data and AI platforms and hybrid cloud; cloud and data platforms, up 17 percent (up 19 percent adjusting for currency); cognitive applications, up 4 percent (up 6 percent adjusting for currency); transaction processing platforms, down 5 percent (down 4 percent adjusting for currency).
  • Global Business Services (includes consulting, application management and global process services) — revenues of $4.1 billion, up 1.0 percent (up 2.2 percent adjusting for currency), led by growth in consulting, up 4 percent (up 5 percent adjusting for currency); gross profit margin increased 110 basis points.
  • Global Technology Services (includes infrastructure and cloud services and technology support services) — revenues of $6.7 billion, down 5.6 percent (down 4.1 percent adjusting for currency).
  • Systems (includes systems hardware and operating systems software) — revenues of $1.5 billion, down 14.7 percent (down 13.8 percent adjusting for currency), reflecting the end of the IBM z14 product cycle and shipping of the new IBM z15 in the last week of September; gross profit margin expansion in Power and Storage.
  • Global Financing (includes financing and used equipment sales) — revenues of $343 million, down 11.7 percent (down 10.7 percent adjusting for currency); revenue reflects the wind-down of OEM commercial financing; gross profit margin expansion.

Full-Year 2019 Expectations

On August 2, 2019, the company updated full-year expectations to reflect the impact of the Red Hat acquisition and related activities.  IBM expects GAAP diluted earnings per share for the full year to be at least $10.58.  The company continues to expect operating (non-GAAP) diluted earnings per share of at least $12.80.  Operating (non-GAAP) diluted earnings per share exclude $2.22 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 over 100 percent of GAAP Net Income.

Year-To-Date 2019 Results

Year-to-date results reflect the impact of items related to the Red Hat acquisition closed in July 2019.  Consolidated diluted earnings per share was $6.45 compared to $7.37, down 12 percent year to year.  Consolidated net income was $5.8 billion, down 15 percent year to year.  Revenues for the nine-month period ended September 30, 2019 totaled $55.4 billion, a decrease of 4 percent year to year (down 0.7 percent adjusting for divested businesses and currency) compared with $57.8 billion for the first nine months of 2018.

Operating (non-GAAP) diluted earnings per share from continuing operations was $8.10 compared with $8.96 per diluted share for the 2018 period, a decrease of 10 percent.  Operating (non-GAAP) net income for the nine months ended September 30, 2019 was $7.2 billion compared with $8.2 billion in the prior-year period, a decrease of 12 percent.

The IBM business model is built to support two principal goals: helping clients succeed in delivering business value by becoming more innovative, efficient and competitive through the use of business insight and information technology (IT) solutions; and, providing long-term value to shareholders. The business model has been developed over time through strategic investments in capabilities and technologies that have the best long-term growth and profitability prospects based on the value they deliver to clients. The company's strategy is to focus on the high-growth, high-value segments of the IT industry. The company's global capabilities include services, software, hardware, fundamental research and financing. The broad mix of businesses and capabilities are combined to provide business insight and solutions for the company's clients.

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