IBM Q3 Misses Revenues, Takes Guidance Lower 

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The FINANCIAL — IBM on October 19 announced third-quarter 2015 diluted earnings from continuing operations of $3.02 per share, down 13 percent year-to-year.  Operating (non-GAAP) diluted earnings from continuing operations were $3.34 per share, compared with operating diluted earnings of $3.68 per share in the third quarter of 2014, a decrease of 9 percent. 

“In the third quarter we again made progress in the transformation of our business to higher value, with strong growth in our strategic imperatives and expanded operating margins,” said Ginni Rometty, IBM chairman, president and chief executive officer.  “We are continuing to make significant investments to build platforms around analytics, cloud, mobility and security that lay the foundation for a new era of cognitive business — where we see long-term value for our clients and shareholders.”

Third-quarter net income from continuing operations was $3.0 billion compared with $3.5 billion in the third quarter of 2014, a decrease of 14 percent.  Operating (non-GAAP) net income was $3.3 billion compared with $3.7 billion in the third quarter of 2014, a decrease of 11 percent, impacted by currency, according to IBM.

Total revenues from continuing operations for the third quarter of 2015 of $19.3 billion were down 14 percent (down 1 percent, adjusting for currency and the divested System x business) from the third quarter of 2014. 

Third-Quarter GAAP – Operating (non-GAAP) Reconciliation

Third-quarter operating (non-GAAP) diluted earnings exclude $0.32 per share of charges: $0.18 per share for the amortization of purchased intangible assets and other acquisition-related charges, and $0.14 per share for non-operating retirement-related charges driven by changes to plan assets and liabilities primarily related to past market performance.

Full-Year 2015 Expectations

IBM expects full-year 2015 GAAP diluted earnings per share of $13.25 to $14.25, and operating (non-GAAP) diluted earnings per share of $14.75 to $15.75.  IBM expects free cash flow to be relatively flat year-to-year.  The 2015 operating (non-GAAP) earnings expectation excludes $1.50 per share of charges for amortization of purchased intangible assets, other acquisition-related charges and retirement-related charges.

Strategic Imperatives

Revenues from the company’s strategic imperatives — cloud, analytics, and engagement — increased 17 percent year-to-year (up 27 percent adjusting for currency and the divested System x business); increased 20 percent year-to-date (up more than 30 percent adjusting for currency and the divested System x business).  Total cloud revenues (public, private and hybrid) increased more than 45 percent (more than 65 percent adjusting for currency and the divested System x business) year-to-date, and is $9.4 billion over trailing 12 months.  The annual run rate for cloud delivered as a service — a subset of the total cloud revenue — increased to $4.5 billion from $3.1 billion in the third quarter of 2014.  Revenues from business analytics increased 9 percent year-to-date (19 percent adjusting for currency).  Revenues year-to-date from mobile more than quadrupled, from security increased 6 percent (12 percent adjusting for currency) and from social increased 32 percent (about 40 percent adjusting for currency).

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Geographic Regions

The Americas’ third-quarter revenues were $9.1 billion, a decrease of 10 percent (down 3 percent adjusting for currency and the divested System x business) from the 2014 period.  Revenues from Europe/Middle East/Africa were $6.1 billion, down 16 percent (up 1 percent adjusting for currency and the divested System x business).  Asia-Pacific revenues decreased 19 percent (down 1 percent adjusting for currency and the divested System x business) to $4.1 billion.  Revenues from the BRIC countries were down 30 percent as reported (down 7 percent adjusting for currency and the divested System x business). 

Services

Global Technology Services segment revenues were down 10 percent (up 1 percent adjusting for currency and the divested System x business) to $7.9 billion.  Global Business Services segment revenues were down 13 percent (down 5 percent adjusting for currency) to $4.2 billion.

The estimated services backlog as of September 30 was $118 billion, up 1 percent year-to-year adjusting for currency.

Software

Revenues from the Software segment were down 10 percent to $5.1 billion (down 3 percent adjusting for currency) compared with the third quarter of 2014. 

Revenues from IBM’s key middleware products, which include WebSphere, Information Management, Tivoli, Workforce Solutions and Rational products, were $3.4 billion, down 7 percent (down 1 percent adjusting for currency) year-to-year.  Operating systems revenues of $0.4 billion were down 14 percent (down 7 percent adjusting for currency) year-to-year.

Hardware

Revenues from the Systems Hardware segment totaled $1.5 billion for the quarter, down 39 percent (down 2 percent adjusting for currency and the divested System x business) year-to-year.                                   

Revenues from z Systems mainframe server products increased 15 percent compared with the year-ago period (up 20 percent adjusting for currency).  Total delivery of z Systems computing power, as measured in MIPS (millions of instructions per second), increased 18 percent.  Revenues from Power Systems were down 3 percent compared with the 2014 period (up 2 percent adjusting for currency).  Revenues from System Storage decreased 19 percent (down 14 percent adjusting for currency).

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Financing

Global Financing segment revenues decreased 8 percent (up 7 percent, adjusting for currency) in the third quarter at $0.4 billion.  

Gross Profit

The company’s total gross profit margin from continuing operations was 48.9 percent in the 2015 third quarter compared with 48.6 percent in the 2014 third quarter.  Total operating (non-GAAP) gross profit margin from continuing operations was 50.0 percent in the 2015 third quarter compared with 49.2 percent in the 2014 third quarter, with an increase in Hardware and an improving segment mix partially offset by declines in Services.

Expense

Total expense and other income from continuing operations decreased to $5.8 billion, down 11 percent compared to the prior-year period, primarily due to the impact of currency.  S,G&A expense of $4.7 billion decreased 10 percent year over year.  R,D&E expense of $1.3 billion decreased 5 percent year-to-year; the related expense-to-revenue ratio increased to 6.7 percent compared with 6.0 percent in the year-ago period.  Intellectual property and custom development income increased to $188 million compared with $145 million a year ago.  Other (income) and expense was income of $133 million compared with prior-year income of $103 million.  Interest expense decreased to $117 million compared with $126 million in the prior year.

Total operating (non-GAAP) expense and other income from continuing operations decreased to $5.7 billion, down 12 percent compared with the prior-year period.  Operating (non-GAAP) S,G&A expense of $4.6 billion decreased 11 percent compared with prior-year expense.  Operating (non-GAAP) R,D&E expense of $1.3 billion decreased 7 percent year-to-year; the related expense-to-revenue ratio increased to 6.6 percent compared with 6.1 percent in the year-ago period.   

 

Pre-Tax Income

Pre-tax income from continuing operations decreased 17 percent to $3.6 billion.  Pre-tax margin from continuing operations decreased 0.7 points to 18.8 percent.  Operating (non-GAAP) pre-tax income from continuing operations decreased 14 percent to $4.0 billion and pre-tax margin was 20.7 percent, flat year to year.

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