IBM EPS Beats - Revenues Miss

April 21, 2020

IBM reported first-quarter 2020 earnings results. Big Blue's earnings came in at $1.84 per share, adjusted with $1.80 in earnings per share expected. The firm noted revenue of $17.57 billion, which was short of the $17.62 billion expectation.

“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.”

“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.”

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.

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.

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