IBM Reports 2020 First-Quarter Results

IBM (NYSE:IBM) today announced first-quarter 2020 earnings results.

“IBM remains focused on helping our clients adapt to the immediate challenges of the COVID-19 pandemic, while we continue to enable them to shift their mission-critical workloads to hybrid cloud and expand their use of AI to help transform their operations," said Arvind Krishna, IBM chief executive officer. "Our first-quarter performance in cloud is a reflection of the trust clients place in IBM's technology and expertise today, and positions us to continue building an enduring hybrid cloud platform for the future.”

Highlights for the first quarter include:

GAAP EPS from continuing operations of $1.31 Operating (non-GAAP) EPS of $1.84 Revenue of $17.6 billion, down 3.4 percent (up 0.1 percent adjusting for divested businesses and currency)
-- Cloud & Cognitive Software up 5 percent (up 7 percent adjusting for currency)
-- Systems up 3 percent (up 4 percent adjusting for currency)
-- Global Business Services flat (up 1 percent adjusting for currency) Total cloud revenue of $5.4 billion, up 19 percent (up 23 percent adjusting for divested businesses and currency)
-- Cloud revenue of $22 billion over last 12 months, up 13 percent (up 16 percent adjusting for divested businesses and currency) Red Hat revenue, up 18 percent (up 20 percent adjusting for currency), normalized for historical comparability GAAP gross profit margin up 90 basis points; Operating (non-GAAP) gross profit margin up 150 basis points Net cash from operating activities of $14.5 billion and free cash flow of $11.6 billion, over the last 12 months IBM is withdrawing its full-year 2020 guidance in light of the current COVID-19 crisis. The company will reassess this position based on the clarity of the macroeconomic recovery at the end of the second quarter.

FIRST QUARTER 2020

Results Reflect the Impact of Items Related to

the Red Hat Acquisition Closed in July 2019

Pre-tax

Gross

Diluted

Net

Pre-tax

Income/(Loss)

Profit

EPS

Income

Income/(Loss)

Margin

GAAP from Continuing Operations

1.31

1.2B

0.0B

(0.3)

45.1

Year/Year

(26)

(103)

(10.6)

Pts

0.9

Pts

Operating (Non-GAAP)

1.84

1.6B

0.7B

3.9

46.2

Year/Year

(18)

(69)

(8.4)

Pts

1.5

Pts

“Our recurring revenue stream, continued gross profit margin expansion and strong balance sheet and liquidity position remain stabilizing elements in an unprecedented business climate,” said James Kavanaugh, IBM senior vice president and chief financial officer. “We’ve taken actions within our business to provide the necessary flexibility and operating efficiency for the current environment.”

Cash Flow and Balance Sheet

In the first quarter, the company generated net cash from operating activities of $4.5 billion, or $2.1 billion excluding Global Financing receivables. IBM’s free cash flow was $1.4 billion. The company returned $1.4 billion to shareholders in dividends.

IBM ended the first quarter with $12.0 billion of cash on hand which includes marketable securities. Debt, including Global Financing debt of $22.3 billion, totaled $64.3 billion – down $8.7 billion since the end of the second-quarter 2019.

Segment Results for First Quarter

Cloud & Cognitive Software (includes Cloud & Data Platforms which includes Red Hat; Cognitive Applications; and Transaction Processing Platforms) — revenues of $5.2 billion, up 5 percent (up 7 percent adjusting for currency), with growth in Cloud & Data Platforms, up 32 percent (up 34 percent adjusting for currency) led by Red Hat. Global Business Services (includes Consulting, Application Management and Global Process Services) — revenues of $4.1 billion, flat year-to-year (up 1 percent adjusting for currency), with growth in Consulting, up 4 percent (up 5 percent adjusting for currency); gross profit margin up 100 basis points. Global Technology Services (includes Infrastructure & Cloud Services and Technology Support Services) — revenues of $6.5 billion, down 6 percent (down 4 percent adjusting for currency); gross profit margin up 30 basis points. Systems (includes Systems Hardware and Operating Systems Software) — revenues of $1.4 billion, up 3 percent (up 4 percent adjusting for currency), led by IBM Z, up 59 percent (up 61 percent adjusting for currency) and Storage Systems revenue up 18 percent (up 19 percent adjusting for currency); gross profit margin up 410 basis points. Global Financing (includes financing and used equipment sales) — revenues of $299 million, down 26 percent (down 25 percent adjusting for currency); revenue reflects the wind-down of OEM commercial financing; gross profit margin up 580 basis points.

Pre-Tax Income and Tax Rate

Pre-tax income was impacted by charges of approximately $0.9 billion, predominantly related to structural actions to improve competitiveness in Global Technology Services. IBM’s reported GAAP and operating (non-GAAP) tax rates for the first quarter include the effect of a non-cash discrete tax benefit, associated with the intercompany transfer of intellectual property, which more than offsets the charges for those structural actions.

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, but not limited to, 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; impairment of the company’s goodwill or amortizable intangible assets; 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, including integration challenges, failure to achieve objectives, the assumption of liabilities, and higher debt levels; legal proceedings and investigatory risks; 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. Except as required by law, 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 —

adjusting for currency (i.e., at constant currency); total revenue and cloud revenue adjusting for divested businesses and currency; revenue for Red Hat normalized for historical comparability; presenting operating (non-GAAP) earnings per share amounts and related income statement items; adjusting for free cash flow; net cash from operating activities, excluding Global Financing receivables.

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/1q20.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,

2020

2019

REVENUE

Cloud & Cognitive Software

5,238

4,967

Global Business Services

4,136

4,155

Global Technology Services

6,467

6,875

Systems

1,368

1,328

Global Financing

299

406

Other

451

TOTAL REVENUE

17,571

18,182

GROSS PROFIT

7,922

8,043

GROSS PROFIT MARGIN

Cloud & Cognitive Software

75.4

75.6

Global Business Services

27.2

26.2

Global Technology Services

34.0

33.7

Systems

50.2

46.2

Global Financing

40.7

34.9

TOTAL GROSS PROFIT MARGIN

45.1

44.2

EXPENSE AND OTHER INCOME

S,G&A

5,955

4,691

R,D&E

1,625

1,433

Intellectual property and custom development income

(116

)

(101

)

Other (income) and expense

182

(73

)

Interest expense

326

210

TOTAL EXPENSE AND OTHER INCOME

7,972

6,160

INCOME/(LOSS) FROM CONTINUING OPERATIONS

BEFORE INCOME TAXES

(49

)

1,883

Pre-tax margin

(0.3

)

10.4

Provision for / (Benefit from) income taxes

(1,226

)

289

Effective tax rate

15.4

INCOME FROM CONTINUING OPERATIONS

1,176

1,593

DISCONTINUED OPERATIONS

Income / (Loss) from discontinued operations, net of taxes

)

NET INCOME

1,175

1,591

EARNINGS / (LOSS) PER SHARE OF COMMON STOCK

Assuming Dilution

Continuing Operations

1.31

1.78

Discontinued Operations

0.00

TOTAL

1.31

1.78

Basic

Continuing Operations

1.32

1.79

Discontinued Operations

0.00

TOTAL

1.32

1.79

WEIGHTED-AVERAGE NUMBER OF COMMON SHARES OUTSTANDING (M’s)

Assuming Dilution

895.0

893.9

Basic

888.0

889.6

_____________________________

* Recast to conform with 2020 presentation.

NM = Not Meaningful

INTERNATIONAL BUSINESS MACHINES CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEET

(Unaudited)

March 31,

December 31,

(Dollars in Millions)

2020

2019

ASSETS:

Current Assets:

Cash and cash equivalents

11,218

8,172

Restricted cash

152

141

Marketable securities

647

696

Notes and accounts receivable - trade, net

6,927

7,870

Short-term financing receivables, net

12,126

14,192

Other accounts receivable, net

1,616

1,733

Inventories

1,786

1,619

Deferred costs

1,948

1,896

Prepaid expenses and other current assets

2,509

2,101

Total Current Assets

38,931

38,420

Property, plant and equipment, net

9,626

10,010

Operating right-of-use assets, net

4,871

4,996

Long-term financing receivables, net

7,708

8,712

Prepaid pension assets

6,933

6,865

Deferred costs

2,459

2,472

Deferred taxes

8,782

5,182

Goodwill

57,517

58,222

Intangibles, net

14,666

15,235

Investments and sundry assets

1,911

2,074

Total Assets

153,403

152,186

LIABILITIES:

Current Liabilities:

Taxes

2,348

2,839

Short-term debt

11,642

8,797

Accounts payable

4,172

4,896

Deferred income

13,377

12,026

Operating lease liabilities

1,327

1,380

Other liabilities

7,806

7,763

Total Current Liabilities

40,673

37,701

Long-term debt

52,685

54,102

Retirement related obligations

16,474

17,142

Deferred income

3,769

3,851

Operating lease liabilities

3,799

3,879

Other liabilities

15,874

14,526

Total Liabilities

133,275

131,202

EQUITY:

IBM Stockholders’ Equity:

Common stock

56,092

55,895

Retained earnings

162,626

162,954

Treasury stock — at cost

(169,437

)

(169,413

)

Accumulated other comprehensive income/(loss)

(29,283

)

(28,597

)

Total IBM Stockholders’ Equity

19,999

20,841

Noncontrolling interests

129

144

Total Equity

20,128

20,985

Total Liabilities and Equity

153,403

152,186

INTERNATIONAL BUSINESS MACHINES CORPORATION

CASH FLOW ANALYSIS

(Unaudited)

Three Months Ended

Trailing Twelve Months

March 31,

Ended March 31,

(Dollars in Millions)

2020

2019

2020

Net Cash Provided by Operating Activities per GAAP:

4,476

4,759

14,487

Less: change in Global Financing (GF) Receivables

2,381

2,458

415

Capital Expenditures, Net

(737

)

(614

)

(2,493

)

Free Cash Flow

1,358

1,688

11,579

Acquisitions

(13

)

(32,642

)

Divestitures

1,069

Dividends

(1,440

)

(1,397

)

(5,749

)

Share Repurchase

—

(920

)

(441

)

Non-GF Debt

3,503

5,890

20,405

Other (includes GF Net Receivables and GF Debt)

(426

)

629

(346

)

Change in Cash, Cash Equivalents, Restricted Cash and Short-term Marketable Securities

3,008

5,922

(6,127

)

INTERNATIONAL BUSINESS MACHINES CORPORATION

CASH FLOW

(Unaudited)

Three Months Ended

March 31,

(Dollars in Millions)

2020

2019

Net Income from Operations

1,175

1,591

Depreciation/Amortization of Intangibles

1,635

1,446

Stock-based Compensation

189

113

Working Capital / Other

(905

)

(848

)

Global Financing A/R

2,381

2,458

Net Cash Provided by Operating Activities

4,476

4,759

Capital Expenditures, net of payments & proceeds

(737

)

(614

)

Divestitures, net of cash transferred

Acquisitions, net of cash acquired

(13

)

Marketable Securities / Other Investments, net

(178

)

(271

)

Net Cash Provided by / (Used in) Investing Activities

(902

)

(853

)

Debt, net of payments & proceeds

1,356

4,232

Dividends

(1,440

)

(1,397

)

Common Stock Repurchases

—

(920

)

Common Stock Transactions – Other

(31

)

(51

)

Net Cash Provided by / (Used in) Financing Activities

(115

)

1,863

Effect of Exchange Rate changes on Cash

(403

)

(102

)

Net Change in Cash, Cash Equivalents and Restricted Cash

3,057

5,668

INTERNATIONAL BUSINESS MACHINES CORPORATION

SEGMENT DATA

(Unaudited)

Three Months Ended March 31, 2020

Cloud &

Global

Cognitive

Business

Technology

Global

(Dollars in Millions)

Software

Services

Systems

Financing

Revenue

External

5,238

4,136

6,467

1,368

299

Internal

813

294

148

212

Total Segment Revenue

6,052

4,183

6,761

1,516

511

Pre-tax Income / (Loss) from Continuing Operations

933

271

(178

)

(217

)

194

Pre-tax margin

15.4

6.5

(2.6

)

(14.3

)

37.9

Change YTY Revenue – External

5.5

(0.5

)

(5.9

)

3.0

(26.2

)

Change YTY Revenue - External @constant currency

6.8

0.9

(4.0

)

4.1

(24.9

)

Three Months Ended March 31, 2019

Cloud &

Global

Cognitive

Business

Technology

Global

(Dollars in Millions)

Software*

Services*

Services

Systems

Financing

Revenue

External

4,967

4,155

6,875

1,328

406

Internal

841

290

163

300

Total Segment Revenue

5,808

4,229

7,164

1,491

706

Pre-tax Income / (Loss) from Continuing Operations

1,785

298

275

(202

)

288

Pre-tax margin

30.7

7.0

3.8

(13.5

)

40.8

_________________________
* Recast to conform with 2020 presentation.

INTERNATIONAL BUSINESS MACHINES CORPORATION

U.S. GAAP TO OPERATING (Non-GAAP) RESULTS RECONCILIATION

(Unaudited; Dollars in millions except per share amounts)

Three Months Ended March 31, 2020

Continuing Operations

Acquisition-

Retirement-

Tax

Reform

Operating

GAAP

Adjustments*

Adjustments**

Impacts

(Non-GAAP)

Gross Profit

7,922

188

—

8,110

Gross Profit Margin

45.1

1.1

Pts

—

46.2

S,G&A

5,955

(285

)

—

5,670

R,D&E

1,625

—

1,625

Other (Income) & Expense

182

)

(264

)

—

(83

)

Interest Expense

326

—

326

Total Expense & Other (Income)

7,972

(285

)

(264

)

—

7,422

Pre-tax Income/(Loss) from Continuing Operations

(49

)

473

264

—

688

Pre-tax Income/(Loss) Margin from Continuing Operations

(0.3

)

2.7

Pts

1.5

Pts

—

3.9

Provision for / (Benefit from) Income Taxes***

(1,226

)

102

149

(961

)

Income from Continuing Operations

1,176

371

250

(149

)

1,649

Income Margin from Continuing Operations

6.7

2.1

Pts

1.4

Pts

(0.8

)

Pts

9.4

Diluted Earnings / (Loss) Per Share: Continuing Operations

1.31

0.42

0.28

(0.17

)

1.84

Three Months Ended March 31, 2019

Continuing Operations

Acquisition-

Retirement-

Tax

Reform

Operating

GAAP

Adjustments*

Adjustments**

Impacts

(Non-GAAP)

Gross Profit

8,043

—

8,119

Gross Profit Margin

44.2

0.4

Pts

—

44.7

S,G&A

4,691

(124

)

—

4,566

R,D&E

1,433

—

1,433

Other (Income) & Expense

(73

)

(138

)

—

(187

)

Interest Expense

210

(36

)

—

174

Total Expense & Other (Income)

6,160

(137

)

(138

)

—

5,886

Pre-tax Income/(Loss) from Continuing Operations

1,883

212

138

—

2,233

Pre-tax Income/(Loss) Margin from Continuing Operations

10.4

1.2

Pts

0.8

Pts

—

12.3

Provision for / (Benefit from) Income Taxes***

289

(141

)

224

Effective Tax Rate

15.4

0.7

Pts

0.2

Pts

(6.3

)

Pts

10.0

Income from Continuing Operations

1,593

164

111

141

2,009

Income Margin from Continuing Operations

8.8

0.9

Pts

0.6

Pts

0.8

Pts

11.0

Diluted Earnings / (Loss) Per Share: Continuing Operations

1.78

0.18

0.13

0.16

2.25

_________________________

Includes amortization of purchased intangible assets, in process R&D, transaction costs, applicable restructuring and related expenses, tax charges related to acquisition integration and pre-closing charges, such as financing costs.

Includes amortization of prior service costs, interest cost, expected return on plan assets, amortized actuarial gains/losses, the impacts of any plan curtailments/settlements and pension insolvency costs and other costs.

***

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. The effective tax rate is not displayed as the calculated rate for the three months ended March 31, 2020 is not meaningful.

INTERNATIONAL BUSINESS MACHINES CORPORATION

U.S. GAAP TO OPERATING (Non-GAAP) RESULTS RECONCILIATION

(Unaudited; Dollars in millions except per share amounts)

Three Months Ended

Trailing Twelve Months Ended

March 31, 2020

Change YTY

Revenue Adjusting for Divested Businesses and Currency

Cloud

Total IBM

Cloud

Revenue as reported

18.8

(3.4

)

13.2

Impact from divested businesses

2.4

Pts

1.9

Pts

1.5

Pts

Currency impact

1.8

Pts

1.5

Pts

1.6

Pts

Revenue adjusting for divested businesses and currency (non-GAAP)

23.0

0.1

16.4

Three Months Ended

Change

Red Hat Revenue, Normalized for Historical Comparability

March 31, 2020

March 31, 2019

YTY

YTY
@constant
currency

Red Hat revenue as reported in IBM consolidated results (1)

719

—

Add: Red Hat revenue prior to acquisition (2)

—

900

Add: Purchase accounting deferred revenue and intercompany adjustments (3)

347

—

Red Hat revenue, normalized for historical comparability (non-GAAP)

1,066

900

(1) Represents GAAP revenue as reported by IBM, which is included in the Cloud & Cognitive Software segment.
(2) Revenue for the three months ended March 31, 2019 represents pre-acquisition Red Hat standalone revenue and is included for comparative purposes.
(3) Represents the first-quarter 2020 impact of the deferred revenue purchase accounting adjustment and adjustments to add back revenue which was eliminated for sales between Red Hat and IBM. This line represents revenue that would have been recognized by Red Hat under GAAP if the acquisition had not occurred, but was not recognized by IBM due to purchase accounting and intercompany adjustments.

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