01—Abstract
Summary
Summary of the 10-K filed March 29, 1999. Cited figures are marked; the original filing is the authoritative source.
International Business Machines Corporation (IBM) reported record 1998 revenue of $81.7 billiona, up 4.0% as reported (6.2% excluding currency effects), marking the fourth consecutive year of record revenue.
Net income rose 3.8% to $6.3 billionb, and diluted EPS reached a record $6.57, up from $6.01 in 1997. Growth was driven by the Global Services segment (revenue up 14.9% to $28.9 billion, with a backlog of $51 billion) and the Software segment (up 6.3%), while the Hardware segments declined 3.3%, with Personal Systems down 10.9% amid severe price pressure. Gross margin fell to 37.8% from 39.0% as revenue mix shifted toward lower-margin services and hardware, though SG&A was held flat and the expense-to-revenue ratio improved.
Balance sheet and capital allocation were central to the year. IBM spent $6.9 billionc repurchasing shares, roughly offsetting net income, so stockholders' equity fell slightly to $19.4 billion, and debt/capitalization rose to 60.2% from 57.6%, largely reflecting growth in global financing debt. Cash and marketable securities totaled $5.8 billion, and the company held $8.8 billion of unused committed credit.
Credit ratings were strong, with senior debt rated A1 by Moody's and A+ by S&P. Looking ahead, management flagged weak economies in Asia and Latin America, continued price pressure in PCs and microelectronics, and Year 2000 uncertainty as 1999 risks. Notable events include a planned two-for-one stock split subject to shareholder approval, the pending sale of the IBM Global Network to AT&T for $5 billiond alongside reciprocal outsourcing contracts, and a $600 million notes offering in February 1999.
02—Key points
Key Highlights
- Record 1998 revenue of $81.7 billion (+4.0% reported, +6.2% constant currency) and record diluted EPS of $6.57, up about 9% from $6.01
- Global Services revenue grew 14.9% to $28.9 billion and services contract backlog reached $51 billion after $33 billion in new contract signings
- Hardware segments revenue fell 3.3% to $35.4 billion, with Personal Systems down 10.9% and hardware gross margin declining to 31.6% from 35.9%
- Gross profit margin contracted to 37.8% from 39.0% due to the mix shift toward lower-margin services and PC price reductions
- Share repurchases of $6.9 billion offset net income, leaving stockholders' equity essentially flat at $19.4 billion and debt/capitalization up to 60.2%
- Proposed two-for-one common stock split (record date May 10, 1999) and pending $5 billion sale of IBM Global Network to AT&T
- Management cited weak Asia and Latin America economies, PC and microelectronics price pressure, and Year 2000 effects as key 1999 uncertainties
03—Questions
Frequently Asked Questions
How did IBM perform financially in 1998?
IBM posted record revenue of $81.7 billion and record net income of $6.3 billion, with diluted EPS of $6.57. Growth was concentrated in Global Services and Software, while hardware sales declined. Operating income was $9.2 billion, and pre-tax income of $9.0 billion was roughly flat versus 1997.
Which business segments drove growth and which lagged?
Global Services (up 14.9% to $28.9 billion) and Software (up 6.3% to $11.9 billion, with an 80.9% gross margin) drove growth, helped by strategic outsourcing and middleware sales. Hardware segments fell 3.3%, led by a 10.9% decline in Personal Systems, and Hardware gross profit dollars dropped 14.8%.
Why did IBM's gross margin decline, and how is the company controlling costs?
Gross margin fell 1.2 points to 37.8% because revenue shifted toward lower-margin services and because of PC and DRAM price pressure. SG&A was flat at $16.7 billion, improving the expense-to-revenue ratio to 20.4% from 21.2%, and R&D was $5.0 billion. Management said it would continue reducing infrastructure costs.
What are the main risks and uncertainties for IBM going forward?
Management highlighted weak Asian and Latin American economies, continued price pressure in Personal Systems and microelectronics, competition from specialized firms, currency and customer-financing risks, and Year 2000 effects on customer purchases. IBM estimated its own Y2K program would cost about $575 million over several years.
How is IBM's balance sheet and capital allocation positioned?
Total debt rose to $29.4 billion, mostly to fund global financing assets, which pushed debt/capitalization to 60.2% from 57.6%. Non-global-financing debt fell to $1.7 billion. IBM held $5.8 billion in cash and marketable securities, had $8.8 billion of unused committed credit, and retained A1/A+ senior debt ratings. It repurchased $6.9 billion of stock in 1998 and had about $2.8 billion of authorization remaining.
04—Continue