The FINANCIAL — IBM on July 18 announced second-quarter earnings results.
“In the second quarter, we strengthened our position as the enterprise cloud leader and added more of the world’s leading companies to the IBM Cloud,” said Ginni Rometty, IBM chairman, president and chief executive officer. “We continue to innovate, adding regtech capabilities to our portfolio of Watson offerings; developing solutions based on emerging technologies such as Blockchain; and reinventing the IBM mainframe by enabling clients to encrypt all data, all the time.”
“We finished the first half of the year where we expected, including continued strong free cash flow generation,” said Martin Schroeter, IBM senior vice president and chief financial officer. “This allowed us to continue our strong R&D investment levels and return more than $5 billion to shareholders through dividends and gross share repurchases during the first half.”
Strategic Imperatives
Second-quarter cloud revenues increased 15 percent (up 17 percent adjusting for currency) to $3.9 billion. Cloud revenue over the last 12 months was $15.1 billion. The annual exit run rate for as-a-service revenue increased to $8.8 billion from $6.7 billion in the second quarter of 2016. Revenues from analytics increased 4 percent (up 6 percent adjusting for currency). Revenues from mobile increased 27 percent (up 29 percent adjusting for currency) and revenues from security increased 4 percent (up 5 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.
Cash Flow and Balance Sheet
In the second quarter, the company generated net cash from operating activities of $3.5 billion; or $3.3 billion excluding Global Financing receivables. IBM’s free cash flow was $2.6 billion. IBM returned $1.4 billion in dividends and $1.4 billion of gross share repurchases to shareholders. At the end of June 2017, IBM had $2.4 billion remaining in the current share repurchase authorization.
IBM ended the second quarter of 2017 with $12.3 billion of cash on hand. Debt totaled $45.7 billion, including Global Financing debt of $29.0 billion. The balance sheet remains strong and, with the completion of the reorganization of its client and commercial financing business, the company is better positioned over the long term, according to IBM.
Segment Results for Second Quarter
Cognitive Solutions (includes solutions software and transaction processing software) — revenues of $4.6 billion, down 2.5 percent (down 1.4 percent adjusting for currency). Pre-tax income increased at a double-digit rate.
Global Business Services (includes consulting, global process services and application management) — revenues of $4.1 billion, down 3.7 percent (down 1.7 percent adjusting for currency). Strategic imperatives grew 8 percent led by the cloud and mobile practices.
Technology Services & Cloud Platforms (includes infrastructure services, technical support services and integration software) — revenues of $8.4 billion, down 5.1 percent (down 3.6 percent adjusting for currency). Strategic imperatives, driven by hybrid cloud services, grew 20 percent.
Systems (includes systems hardware and operating systems software) — revenues of $1.7 billion, down 10.4 percent (down 9.6 percent adjusting for currency).
Global Financing (includes financing and used equipment sales) — revenues of $415 million, down 2.2 percent (down 1.7 percent adjusting for currency).
Tax Rate
IBM’s reported GAAP and operating (non-GAAP) tax rates of 4.5 percent and 9.2 percent, respectively, include the effect of discrete tax benefits in the quarter, which contributed $0.18 to the company’s earnings per share. For the second quarter, IBM’s ongoing effective GAAP and operating (non-GAAP) tax rates were approximately 12 percent and approximately 15 percent, respectively. The company continues to expect a full-year ongoing effective operating (non-GAAP) tax rate of 15 percent plus or minus 3 points, excluding discrete items.
Year-To-Date 2017 Results
Consolidated diluted earnings per share were $4.32 compared to $4.69, down 8 percent year to year. Consolidated net income was $4.1 billion compared to $4.5 billion in the year-ago period, a decrease of 10 percent. Revenues from continuing operations for the six-month period totaled $37.4 billion, a decrease of 4 percent year to year (decrease of 3 percent adjusting for currency) compared with $38.9 billion for the first six months of 2016.
Operating (non-GAAP) diluted earnings per share from continuing operations were $5.35 compared with $5.30 per diluted share for the 2016 period, an increase of 1 percent. Operating (non-GAAP) net income for the six months ended June 30, 2017 was $5.0 billion compared with $5.1 billion in the year-ago period, a decrease of 1 percent.
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