IBM Reports 2016 Second-Quarter Earnings

Continued Strong Growth in Strategic Imperatives Led by IBM Cloud

ARMONK, N.Y. - 18 Jul 2016: Highlights

  • Diluted EPS: GAAP of $2.61; Operating (non-GAAP) of $2.95
  • Revenue from continuing operations of $20.2 billion
  • Strategic imperatives revenue of $30.7 billion over the last 12 months represents 38 percent of IBM revenue
    • - Strategic imperatives revenue of $8.3 billion in the quarter, up 12 percent year to year
  • Cloud revenue of $11.6 billion over the last 12 months
    • - Cloud as-a-service annual run rate of $6.7 billion in the quarter, up 50 percent year to year

IBM (NYSE: IBM) today announced second-quarter 2016 earnings results.

"IBM continues to establish itself as the leading cognitive solutions and cloud platform company.  In doing so, IBM is pioneering new business opportunities beyond the traditional IT marketplace," said Ginni Rometty, IBM chairman, president and chief executive officer.  "In the second quarter we delivered double-digit revenue growth in our strategic imperatives, driven by innovations in areas such as analytics, security, cloud video services and Watson Health, all powered by the IBM Cloud and differentiated by industry.  And we continue to invest for growth with recent breakthroughs in quantum computing, Internet of Things and Blockchain solutions for the IBM Cloud."

      Gross Profit
  Diluted EPS Net Income Margin
GAAP from Continuing Operations $2.61 $2.5B 47.9%
  Year/Year -27% -29% -2.0Pts
Operating (Non-GAAP) $2.95 $2.8B 49.0%
  Year/Year -23% -25% -1.9Pts
REVENUE Total IBM Imperatives Cloud
As reported (US$) $20.2B $8.3B $3.4B
  Year/Year -3% 12% 30%

“In the first half of 2016, we grew our R&D investment, closed 11 acquisitions for more than $5 billion and invested nearly $2 billion in capital expenditures, while returning more than $4 billion to shareholders through dividends and gross share repurchases,” said Martin Schroeter, IBM senior vice president and chief financial officer. “These investments are key in helping us build new markets and maintain our leadership in enterprise IT.”

Strategic Imperatives

Second-quarter revenues from the company’s strategic imperatives --- cloud, analytics and engagement --- increased 12 percent year to year.  Cloud revenues (public, private and hybrid) for the quarter increased 30 percent.  Cloud revenue over the trailing 12 months was $11.6 billion.  The annual run rate for cloud as-a-service revenue --- a subset of total cloud revenue --- increased to $6.7 billion from $4.5 billion in the second quarter of 2015.  Revenues from analytics increased 5 percent (up 4 percent adjusting for currency).  Revenues from mobile increased 43 percent and from security increased 18 percent.

Full-Year 2016 Expectations

The company continues to expect operating (non-GAAP) diluted earnings per share of at least $13.50.  This excludes $1.27 per share of charges for amortization of purchased intangible assets, other acquisition-related charges and retirement-related charges.  As a result, GAAP diluted earnings per share are now expected to be at least $12.23.

There is no change to IBM's previously provided free cash flow guidance.

Cash Flow and Balance Sheet

The company generated net cash from operating activities of $3.4 billion; or $3.1 billion excluding Global Financing receivables. IBM’s free cash flow was $2.1 billion in the second quarter.  IBM returned $1.3 billion in dividends and $0.8 billion of gross share repurchases to shareholders.  At the end of June 2016, IBM had $3.9 billion remaining in the current share repurchase authorization.

IBM ended the second-quarter 2016 with $10.6 billion of cash on hand.  Debt, including Global Financing debt of $26.5 billion, totaled $44.5 billion.  Core (non-global financing) debt totaled $18.0 billion.  The balance sheet remains strong and is well positioned to support the business over the long term.

Segment Results

  • Cognitive Solutions (includes solutions software and transaction processing software) -- revenues of $4.7 billion, up 3.5 percent (up 3.8 percent adjusting for currency).  Cloud revenue within the segment grew 54 percent.  Solutions software revenue grew, led by Analytics (including Watson) and Security.
  • Global Business Services (includes consulting, global process services, application management) -- revenues of $4.3 billion, down 2.0 percent (down 2.5 percent adjusting for currency).  Strategic imperatives revenue within the segment was up 14 percent (up 13 percent adjusting for currency).
  • Technology Services & Cloud Platforms (includes infrastructure services, technical support services, integration software) -- revenues of $8.9 billion, down 0.5 percent (flat adjusting for currency).  Growth of 35 percent in strategic imperatives revenue within the segment was driven by strong hybrid cloud infrastructure services performance.
  • Systems (includes systems hardware and operating systems software) -- revenues of $2.0 billion, down 23.2 percent (down 23.3 percent adjusting for currency).  Revenue reflects z Systems product cycle dynamics; gross profit margin improved in both z Systems and Power.
  • Global Financing (includes financing and used equipment sales) -- revenues of $424 million, down 11.3 percent (down 10.0 percent adjusting for currency).

Year-To-Date 2016 Results

Diluted earnings per share from continuing operations were $4.69, down 22 percent compared to the 2015 period.  Net income from continuing operations for the six months ended June 30, 2016 was $4.5 billion compared with $5.9 billion in the year-ago period, a decrease of 24 percent.

Consolidated net income was $4.5 billion compared to $5.8 billion in the year-ago period.  Consolidated diluted earnings per share were $4.69 compared to $5.84, down 20 percent year to year. Revenues from continuing operations for the six-month period totaled $38.9 billion, a decrease of 4 percent (down 2 percent year to year, adjusting for currency) compared with $40.4 billion for the first six months of 2015.

Operating (non-GAAP) diluted earnings per share from continuing operations were $5.30 compared with $6.75 per diluted share for the 2015 period, a decrease of 21 percent.  Operating (non-GAAP) net income from continuing operations for the six months ended June 30, 2016 was $5.1 billion compared with $6.7 billion in the year-ago period, a decrease of 24 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; 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 personnel 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  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).

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