01—Abstract
Summary
Summary of the 10-K filed February 24, 2015. Cited figures are marked; the original filing is the authoritative source.
International Business Machines (IBM) reported a challenging 2014 for reported results, with revenue of $92.8 billiona, down 5.7% as reported (1.5% adjusted for currency and divestitures).
The decline reflected the divestiture of the industry standard server (System x) and customer care businesses, weakness in Systems and Technology (revenue down 23%, driven by the System z product cycle and Power Systems/Storage declines), and currency headwinds. Diluted EPS from continuing operations was $15.59b as reported and $16.53 on an operating (non-GAAP) basis, while consolidated net income fell 27% to $12.0 billion because of a $3.7 billion after-tax loss from discontinued operations tied to the pending Microelectronics divestiture to GLOBALFOUNDRIES. Operating (non-GAAP) earnings declined 9% to $16.7 billion.
The filing emphasizes a strategic repositioning toward higher-value areas it calls the strategic imperatives (cloud, analytics, mobile, social and security), which generated about $25 billionc, or roughly 27% of revenue, and grew 16% in 2014. Offsetting this, the recurring core franchises declined about 3% and high-value transactional businesses declined, and Global Services backlog fell 10.1% as reported to $128.4 billion. Capital allocation remained shareholder-focused: the company returned $17.9 billion through dividends and gross buybacks, repurchasing about 71.5 million shares, while free cash flow fell to $12.4 billion from $15.0 billion.
Looking to 2015, management guided GAAP EPS from continuing operations to $14.35 to $15.10d and operating EPS to $15.75 to $16.50, and expects total revenue as reported to be flat to down given currency (a 5-6 point revenue headwind at January spot rates). Free cash flow is expected to be roughly flat. Key risks highlighted include the growth markets slowdown (BRIC revenue down about 11% as reported), China weakness, pension funding and cost pressures, currency translation, cybersecurity, and ongoing legal matters such as the SCO litigation and UK and Spanish pension disputes.
02—Key points
Key Highlights
- Revenue of $92.8 billion, down 5.7% as reported and about 1.5% adjusted for divestitures and currency; the strategic imperatives grew 16% to roughly $25 billion (about 27% of revenue).
- GAAP diluted EPS from continuing operations of $15.59 (up 1.9%), while operating (non-GAAP) diluted EPS of $16.53 declined 0.7%, helped by share repurchases of about 71.5 million shares.
- Net income fell 27.1% to $12.0 billion, driven by a $3.7 billion loss from discontinued operations, mainly a $4.7 billion pre-tax charge to write down the Microelectronics business being sold to GLOBALFOUNDRIES.
- Systems and Technology revenue fell 23.0% to $10.0 billion, reflecting the end of the System z product cycle, Power Systems and Storage declines, and the System x divestiture.
- Free cash flow declined to $12.4 billion from $15.0 billion, and the company returned $17.9 billion to shareholders via $13.7 billion in gross buybacks and $4.3 billion in dividends.
- Global Services backlog fell 10.1% to $128.4 billion, and total signings dropped 18.4%, a leading indicator management will need to address.
- 2015 guidance calls for GAAP EPS of $14.35 to $15.10 and operating EPS of $15.75 to $16.50, with total reported revenue not expected to grow due to currency headwinds.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2014filed February 24, 2015Financial Statements
FY2014 against FY2013
| Line item | FY2014FY2013 | Change |
|---|---|---|
| Revenue | $92.79B$98.37B | −5.7% |
| Cost of Revenue | $46.39B$49.68B | −6.6% |
| Gross Profit | $46.41B$48.68B | −4.7% |
| R&D Expenses | $5.44B$5.74B | −5.3% |
| SG&A Expenses | $23.18B$23.45B | −1.2% |
| Interest Expense | $484.00M$402.00M | +20.4% |
| Net Income | $12.02B$16.48B | −27.1% |
| EPS (Basic) | $11.97$15.06 | −20.5% |
| EPS (Diluted) | $11.90$14.94 | −20.3% |
| Shares Outstanding (Basic) | 1.00B1.09B | −8.2% |
| Shares Outstanding (Diluted) | 1.01B1.10B | −8.4% |
05—Questions
Frequently Asked Questions
Why did IBM's reported net income fall so sharply in 2014?
Net income declined 27% to $12.0 billion mainly because of a $3.7 billion after-tax loss from discontinued operations. This loss was driven by a $4.7 billion pre-tax charge to write down the Microelectronics business, which IBM agreed in October 2014 to sell to GLOBALFOUNDRIES. Income from continuing operations fell a smaller 6.7% to $15.8 billion.
How much of IBM's business is in its strategic growth areas?
The strategic imperatives (cloud, analytics, mobile, social and security) generated about $25 billion in 2014, roughly 27% of total revenue, and grew 16% year over year. Business analytics revenue was about $17 billion, cloud revenue about $7 billion (up 60%), and security revenue rose 19%. Management expects these areas to keep growing at a double-digit rate.
What is driving the weakness in IBM's hardware and core businesses?
Systems and Technology revenue fell 23% as reported, reflecting the late stage of the System z mainframe product cycle, declining Power Systems and Storage revenue, and the divestiture of the industry standard server business. The recurring core franchises declined about 3%, and growth markets such as China, India and Brazil were a significant drag, with BRIC revenue down about 11% as reported.
What does IBM expect for 2015 and what are the key risks?
IBM guided 2015 GAAP EPS from continuing operations to $14.35 to $15.10 and operating EPS to $15.75 to $16.50, with free cash flow expected to be roughly flat versus 2014. Total revenue as reported is not expected to grow, with currency expected to reduce revenue growth by 5-6 points at January 2015 spot rates. Key risks include weak demand in many growth markets, the strong U.S. dollar, software transaction revenue pressure from business model changes, cybersecurity threats, pension funding requirements, and litigation including the SCO matter and UK and Spanish pension disputes.
06—Continue