IBM Misses on Revenue

October 17, 2018

IBM Reported third-quarter results. The services firm reported earnings of $3.42 per share, excluding certain items, which compared to $3.40 per share investors expected. On the revenue side, IBM noted $18.76 billion, but the Street was looking for $19.10 billion.

"IBM's progress and momentum this year in the emerging, high-value segments of the IT industry are driven by our innovative technology, deep industry expertise and commitment to trust and security," said Ginni Rometty, IBM chairman, president and chief executive officer. "Our leadership in the technology and services that deliver hybrid cloud, AI, blockchain, analytics and security has helped drive our overall performance, and is helping our clients unleash the full business value of these innovations."

"In the quarter, we again expanded our overall operating pre-tax income margin year to year, and produced our strongest year-to-year gross margin performance in three years," said James Kavanaugh, IBM senior vice president and chief financial officer. "At the same time, with our strong cash generation, we increased our capital investment in the business through the first three quarters and continued to return capital to shareholders."

Strategic Imperatives Revenue

Strategic imperatives revenue over the last 12 months was $39.5 billion, up 13 percent (up 11 percent adjusting for currency).  Total cloud revenue over the last 12 months was $19.0 billion, up 20 percent (up 18 percent adjusting for currency), with $8.1 billion from hardware, software and services to enable IBM clients to implement hybrid cloud solutions across public, private and multi-cloud environments, and $10.9 billion delivered as a service.  The annual exit run rate for as-a-service revenue increased in the quarter to $11.4 billion, up 21 percent (up 24 percent adjusting for currency).

Cash Flow and Balance Sheet

In the third quarter, the company generated net cash from operating activities of $4.2 billion, or $3.1 billion, excluding Global Financing receivables.  IBM’s free cash flow was $2.2 billion.  IBM returned $2.1 billion to shareholders through $1.4 billion in dividends and $0.6 billion in gross share repurchases.  At the end of September 2018, IBM had $1.4 billion remaining in the current share repurchase authorization.

IBM ended the third quarter with $14.7 billion of cash on hand.  Debt totaled $46.9 billion, including Global Financing debt of $30.4 billion.  The balance sheet remains strong and is well positioned for the long term.

Segment Results for Third Quarter

  • Cognitive Solutions (includes solutions software and transaction processing software) -- revenues of $4.1 billion, down 6 percent (down 5 percent adjusting for currency), with growth in Watson health, security solutions, and key strategic areas in analytics.
  • Global Business Services (includes consulting, application management and global process services) -- revenues of $4.1 billion, up 1 percent (up 3 percent adjusting for currency), led by consulting.  Gross profit margin increased 270 basis points.
  • Technology Services & Cloud Platforms (includes infrastructure services, technical support services and integration software) -- revenues of $8.3 billion, down 2 percent (flat year to year adjusting for currency), with growth in cloud revenue.  Gross profit margin increased 120 basis points.
  • Systems (includes systems hardware and operating systems software) -- revenues of $1.7 billion, up 1 percent (up 2 percent adjusting for currency), driven by growth in Power and IBM Z.
  • Global Financing (includes financing and used equipment sales) -- revenues of $388 million, down 9 percent (down 7 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, retirement-related charges and any one-time impacts from the enactment of U.S. Tax Reform.  GAAP expectations exclude any fourth-quarter one-time 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.

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