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IBM Reports 2018 Second Quarter Results

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Revenue Up 4 Percent Year to Year; Strong Profit Performance

Highlights

  • GAAP EPS from continuing operations of $2.61; Operating (non-GAAP) EPS of $3.08; both up 5 percent
  • GAAP Pre-tax income up 14 percent; Operating (non-GAAP) pre-tax income up 11 percent
    -- Pre-tax margins expanded more than 100 basis points year to year
  • Revenue of $20.0 billion, up 4 percent (up 2 percent adjusting for currency)
  • Strategic imperatives revenue of $39.0 billion over last 12 months, up 15 percent (up 12 percent adjusting for currency); represents 48 percent of IBM revenue
  • Cloud revenue of $18.5 billion over last 12 months, up 23 percent (up 20 percent adjusting for currency)
  • As-a-service annual exit run rate for cloud revenue of $11.1 billion in the quarter, up 26 percent year to year (up 24 percent adjusting for currency)
  • Maintains full-year operating (non-GAAP) EPS and free cash flow expectations

IBM today announced second-quarter results.

"We delivered strong revenue and profit growth in the quarter, underscoring IBM's progress and momentum in the emerging, high-value segments of the IT industry," said Ginni Rometty, IBM chairman, president and chief executive officer.  "More clients are engaging IBM on their journey to the cloud, and deploying IBM Cloud, Watson AI, analytics, blockchain and security solutions.  This demonstrates IBM's unique leadership in providing innovative technology coupled with deep industry expertise, trust and security."

 

SECOND QUARTER 2018

 


Diluted EPS

 


Net Income

 

Pre-tax
Income

 

Gross Profit
Margin

GAAP from Continuing Operations

$2.61

 

$2.4B

 

$2.8B

 

46.0%

  Year/Year

5%

 

3%

 

14%

 

(0.5)Pts

               

Operating (Non-GAAP)

$3.08

 

$2.8B

 

$3.4B

 

46.5%

  Year/Year

5%

 

3%

 

11%

 

(0.6)Pts

               



REVENUE



Total IBM

 


Strategic
Imperatives

 



Cloud

 

As-a-service
annual exit
run rate

As reported (US$)

$20.0B

 

$10.1B

 

$4.7B

 

$11.1B

  Year/Year

4%

 

15%

 

20%

 

26%

  Year/Year adjusting for currency

2%

 

13%

 

18%

 

24%


"We increased revenue, grew pre-tax income double digits and expanded pre-tax income margins year to year, while continuing to invest in the business and return capital to shareholders," said James Kavanaugh, IBM senior vice president and chief financial officer.  "We remain focused on delivering consistent operational performance, in line with our longer-term model."

Strategic Imperatives Revenue

Strategic imperatives revenue over the last 12 months was $39.0 billion, up 15 percent (up 12 percent adjusting for currency).  Total cloud revenue over the last 12 months was $18.5 billion, up 23 percent (up 20 percent adjusting for currency), with $8.2 billion from hardware, software and services to enable IBM clients to implement hybrid cloud solutions across public, private and multi-cloud environments, and $10.4 billion delivered as a service.  The annual exit run rate for as-a-service revenue increased in the quarter to $11.1 billion, up 26 percent (up 24 percent adjusting for currency). 

In the second quarter, revenues from analytics increased 7 percent to $5.4 billion (up 5 percent adjusting for currency); revenues from mobile increased 5 percent to $1.3 billion (up 3 percent adjusting for currency); and revenues from security increased 81 percent to $1.0 billion (up 79 percent adjusting for currency).

Cash Flow and Balance Sheet

In the second quarter, the company generated net cash from operating activities of $2.3 billion, or $2.9 billion, excluding Global Financing receivables.  IBM’s free cash flow was $1.9 billion.  IBM returned $2.4 billion to shareholders through $1.4 billion in dividends and $1.0 billion in gross share repurchases.  At the end of June 2018, IBM had $2.0 billion remaining in the current share repurchase authorization.

IBM ended the second quarter with $11.9 billion of cash on hand.  Debt totaled $45.5 billion, including Global Financing debt of $31.1 billion.  The balance sheet remains strong and is well positioned for the long term.

Segment Results for Second Quarter

  • Cognitive Solutions (includes solutions software and transaction processing software) -- revenues of $4.6 billion, flat year to year (down 1 percent adjusting for currency), with growth in analytics and industry vertical solutions led by financial services and IoT.
  • Global Business Services (includes consulting, global process services and application management) -- revenues of $4.2 billion, up 2 percent (flat year to year adjusting for currency), with growth in consulting driven by digital offerings.
  • Technology Services & Cloud Platforms (includes infrastructure services, technical support services and integration software) -- revenues of $8.6 billion, up 2 percent (flat year to year adjusting for currency).  Strategic imperatives revenue grew 26 percent, led by hybrid cloud services, security and mobile.
  • Systems (includes systems hardware and operating systems software) -- revenues of $2.2 billion, up 25 percent (up 23 percent adjusting for currency) driven by growth in IBM Z, Power Systems and storage.
  • Global Financing (includes financing and used equipment sales) -- revenues of $394 million, down 5 percent (down 6 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 and retirement-related charges as well as 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 were $4.43 compared to $4.32, up 3 percent year to year.  Consolidated net income was $4.1 billion, flat year to year.  Revenues from continuing operations for the six-month period totaled $39.1 billion, an increase of 4 percent year to year (up 1 percent adjusting for currency) compared with $37.4 billion for the first six months of 2017.

Operating (non-GAAP) diluted earnings per share from continuing operations was $5.53 compared with $5.28 per diluted share for the 2017 period, an increase of 5 percent.  Operating (non-GAAP) net income for the six months ended June 30, 2018 was $5.1 billion compared with $5.0 billion in the year-ago period, an increase of 2 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/2q18.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).

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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