IBM Reports 4Q Revenue $21.8B, Down 3% YoY

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1/22/2019
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Highlights

Fourth Quarter:

• GAAP EPS from continuing operations of $2.15

-- Includes charge of $1.9 billion related to the U.S. Tax Cuts and Jobs Act of 2017

• Operating (non-GAAP) EPS of $4.87

• Revenue of $21.8 billion, down 3 percent (down 1 percent adjusting for currency)

-- Global Business Services and Cognitive Solutions revenue grew year to year

• Gross profit margin up 10 basis points year to year; pre-tax income margin up more than 50 basis points year to year

-- Continued strong services gross profit margin expansion year to year

Full Year:

• GAAP EPS from continuing operations of $9.51

-- Includes charge of $2.0 billion related to the U.S. Tax Cuts and Jobs Act of 2017

• Operating (non-GAAP) EPS of $13.81

• Revenue of $79.6 billion, up 1 percent (flat year to year adjusting for currency)

• Strategic imperatives revenue of $39.8 billion, up 9 percent

• Cloud revenue of $19.2 billion, up 12 percent

-- As-a-service annual exit run rate for cloud revenue of $12.2 billion in the quarter, up 18 percent year to year (up 21 percent adjusting for currency)

2019 Expectations:

• GAAP EPS of at least $12.45; Operating (non-GAAP) EPS of at least $13.90

• Free cash flow of approximately $12 billion

ARMONK, N.Y., January 22, 2019 . . . IBM (NYSE: IBM(http://www.ibm.com/investor)) today announced fourth-quarter and full-year 2018 earnings results.

"In 2018 we returned to full-year revenue growth, reflecting growing demand for our services and leadership solutions in hybrid cloud, AI, analytics and security," said Ginni Rometty, IBM chairman, president and chief executive officer. "Major clients worldwide, such as BNP Paribas, are turning to the IBM Cloud and our unmatched industry expertise to transform their businesses and drive innovation."

"In the quarter we expanded both gross margin and pre-tax income margin," said James Kavanaugh, IBM senior vice president and chief financial officer. "In 2018 we repositioned our business model and delivered revenue, operating profit and EPS growth along with strong free cash flow realization. We continue to optimize our portfolio for the high-value, emerging segments of our industry, while returning capital to our shareholders."

Cash Flow and Balance Sheet

In the fourth quarter, the company generated net cash from operating activities of $4.1 billion, or $7.3 billion, excluding Global Financing receivables. IBM’s free cash flow was $6.5 billion. IBM returned $3.5 billion to shareholders through $1.4 billion in dividends and $2.0 billion in gross share repurchases. At the end of December 2018, IBM had $3.3 billion remaining in the current share repurchase authorization.

The company generated full-year free cash flow of $11.9 billion, excluding Global Financing receivables, and returned $10.1 billion to shareholders through $5.7 billion in dividends and $4.4 billion of gross share repurchases.

IBM ended the fourth quarter with $12.2 billion of cash on hand. Debt totaled $45.8 billion, including Global Financing debt of $31.2 billion. The balance sheet remains strong and is well positioned for the long term.

Segment Results for Fourth Quarter

* Cognitive Solutions (includes solutions software and transaction processing software) -- revenues of $5.5 billion, flat year to year (up 2 percent adjusting for currency), led by growth in solutions software, including analytics and AI.

* Global Business Services (includes consulting, application management and global process services) -- revenues of $4.3 billion, up 4 percent (up 6 percent adjusting for currency), with growth across consulting, application management and global process services. Gross profit margin increased 300 basis points.

* Technology Services & Cloud Platforms (includes infrastructure services, technical support services and integration software) -- revenues of $8.9 billion, down 3 percent (flat year to year adjusting for currency), with growth in hybrid cloud revenue. Gross profit margin increased more than 140 basis points.

* Systems (includes systems hardware and operating systems software) -- revenues of $2.6 billion, down 21 percent (down 20 percent adjusting for currency), with growth in Power, offset by the impact of the IBM Z product cycle dynamics.

* Global Financing (includes financing and used equipment sales) -- revenues of $402 million, down 11 percent (down 9 percent adjusting for currency).

Tax Rate

As a result of the enactment of the U.S. Tax Cuts and Jobs Act of 2017, IBM recorded charges of $2.0 billion in 2018, including $1.9 billion in the fourth quarter, primarily related to deferred taxes for the new Global Intangible Low-Taxed Income (GILTI) tax. This is in addition to the charge of $5.5 billion the company recorded in the fourth quarter of 2017 related to the one-time U.S. transition tax, foreign tax costs on undistributed foreign earnings and the remeasurement of deferred taxes. These charges are included in the GAAP results for the fourth quarter and full year for 2017 and 2018.

IBM's reported GAAP tax rate, which includes the charge, for the fourth quarter was 56 percent in 2018 compared with 124 percent in 2017; and for the full year was 23 percent compared with 49 percent in 2017.

IBM's operating (non-GAAP) earnings and tax rate for 2018 exclude the charges. IBM's reported operating (non-GAAP) tax rate for the fourth quarter was 12 percent in 2018 compared with 6 percent in 2017; and for the full year was 8 percent in 2018 compared with 7 percent in 2017.

Full-Year 2018 Results

Consolidated diluted earnings per share from continuing operations was $9.51 compared with $6.14 for 2017, up 55 percent year to year. Consolidated net income was $8.7 billion, up 52 percent. Revenues for the full year totaled $79.6 billion, an increase of 1 percent year to year (flat year to year adjusting for currency), compared with $79.1 billion for the full-year 2017.

Operating (non-GAAP) diluted earnings per share from continuing operations was $13.81 compared with $13.66 per diluted share for 2017, an increase of 1 percent. Operating (non-GAAP) net income for the full year was $12.7 billion compared with $12.8 billion in the year-ago period, a decrease of 1 percent.

Strategic imperatives revenue for the full year was $39.8 billion, up 9 percent. Full-year cloud revenue was $19.2 billion, up 12 percent, with $11.3 billion delivered as a service and $7.8 billion for cloud-related hardware, software and services to enable IBM clients to implement cloud solutions across public, private and multi-cloud environments. The annual exit run rate for as-a-service revenue increased in the quarter to $12.2 billion, up 18 percent (up 21 percent adjusting for currency).

Full-Year 2019 Expectations

The company expects GAAP diluted earnings per share of at least $12.45, and operating (non-GAAP) diluted earnings per share of at least $13.90. Operating (non-GAAP) diluted earnings per share exclude $1.45 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 expects free cash flow of approximately $12 billion, with a realization rate of approximately 100 percent of GAAP Net Income.

IBM Corp. (NYSE: IBM)

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