IBM Falls on Q1 Earnings Beat, Revenue Miss 

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The FINANCIAL — IBM on April 18 announced first-quarter earnings results.

“In the first quarter, both the IBM Cloud and our cognitive solutions again grew strongly, which fueled robust performance in our strategic imperatives,” said Ginni Rometty, IBM chairman, president and chief executive officer.  “In addition, we are developing and bringing to market emerging technologies such as blockchain and quantum, revolutionizing how enterprises will tackle complex business problems in the years ahead.”

“We continued to make investments in the first quarter to expand our cognitive and cloud platform and we increased our research and development spending,” said Martin Schroeter, IBM senior vice president and chief financial officer.  “At the same time we returned more than $2.6 billion to shareholders through dividends and gross share repurchases.”

Strategic Imperatives

First-quarter cloud revenues increased 33 percent (up 35 percent adjusting for currency) to $3.5 billion.  Cloud revenue over the last 12 months was $14.6 billion.  The annual exit run rate for cloud as-a-service revenue increased to $8.6 billion from $5.4 billion in the first quarter of 2016.  Revenues from analytics increased 6 percent (up 7 percent adjusting for currency).  Revenues from mobile increased 20 percent (up 22 percent adjusting for currency) and revenues from security increased 9 percent (up 10 percent adjusting for currency).

Full-Year 2017 Expectations

The company continues to expect operating (non-GAAP) diluted earnings per share of at least $13.80 and GAAP diluted earnings per share of at least $11.95.  Operating (non-GAAP) diluted earnings per share exclude $1.85 per share of charges for amortization of purchased intangible assets, other acquisition-related charges and retirement-related charges.  IBM continues to expect free cash flow to be relatively flat year to year.

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Cash Flow and Balance Sheet

In the first quarter, the company generated net cash from operating activities of $4.0 billion, or $1.9 billion excluding Global Financing receivables.  IBM’s free cash flow was $1.1 billion, down year to year consistent with the amount of the Japan tax refund received in the first quarter of 2016.  IBM returned $1.3 billion in dividends and $1.3 billion of gross share repurchases to shareholders.  At the end of March 2017, IBM had $3.8 billion remaining in the current share repurchase authorization.

IBM ended the first quarter of 2017 with $10.7 billion of cash on hand.  Debt, including Global Financing debt of $28.5 billion, totaled $42.8 billion.  Core (non-Global Financing) debt totaled $14.3 billion.  The balance sheet remains strong and is well positioned to support the business over the long term, according to IBM.

Segment Results for First Quarter

Cognitive Solutions (includes Solutions Software and Transaction Processing Software) — revenues of $4.1 billion, up 2.1 percent (up 2.8 percent adjusting for currency) were driven by growth in analytics and security, which include Watson-related offerings.

Global Business Services (includes Consulting, Global Process Services and Application Management) — revenues of $4.0 billion, down 3.0 percent (down 1.9 percent adjusting for currency).  Strategic imperatives grew double digits led by the cloud and mobile practices.

Technology Services & Cloud Platforms (includes Infrastructure Services, Technical Support Services and Integration Software) — revenues of $8.2 billion, down 2.5 percent (down 2.0 percent adjusting for currency) with strong growth in strategic imperatives driven by hybrid cloud services.

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Systems (includes Systems Hardware and Operating Systems Software) — revenues of $1.4 billion, down 16.8 percent (down 16.1 percent adjusting for currency).

Global Financing (includes financing and used equipment sales) — revenues of $405 million, down 1.2 percent (down 2.1 percent adjusting for currency).

Tax Rate

For the first quarter, IBM’s ongoing effective GAAP tax rate was approximately 12 percent. The ongoing effective operating (non-GAAP) tax rate was approximately 15 percent, which is within the expected range of 15 percent plus or minus 3 points provided earlier this year.  IBM’s reported tax rates include the effect from a discrete tax benefit disclosed earlier this year.


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