01—Abstract
Summary
Summary of the 10-K filed February 23, 2016. Cited figures are marked; the original filing is the authoritative source.
International Business Machines Corporation (IBM) reported a challenging 2015 on a reported basis, with revenue falling 11.9% to $81.7 billiona as currency (8 points) and divestitures of System x and customer care (3 points) weighed heavily; adjusted for currency and divestitures, revenue was roughly flat (down 1%).
Diluted EPS from continuing operations declined 12.8% to $13.60b (operating non-GAAP EPS of $14.92, down 9.7%), while consolidated net income rose 9.7% to $13.2 billion thanks to a much smaller loss from discontinued operations (the Microelectronics divestiture). Cash generation remained strong, with $17.0 billion in operating cash flow and $13.1 billion in free cash flow, and IBM returned $9.5 billion to shareholders through $4.9 billion in dividends and $4.6 billion in buybacks. Management is steering the company toward its 'strategic imperatives' (cloud, big data and analytics, mobile, social and security), which generated $28.9 billion, or about 35% of revenue, and grew 17% as reported (26% adjusted for currency and divestitures).
Cloud revenue reached $10.2 billionc, and the company highlighted acquisitions such as Cleversafe and Merge Healthcare, plus the January 2016 Weather Company deal. Traditional segments are under pressure: Global Services revenue fell 10.5%, Software fell 9.8%, and Systems Hardware fell 24.2% (up 8% adjusted), with mainframe (z Systems) strength offsetting weak storage. Global Services backlog ended at $121 billion, up 1% adjusted for currency.
For 2016, IBM guided to GAAP EPS of at least $12.45d and operating EPS of at least $13.50, with currency expected to weigh more heavily on profit (about $1.3 billion pre-tax impact at January spot rates) and free cash flow expected at $11–12 billion. Balance sheet leverage is significant: total debt was $39.9 billion, of which $27.2 billion supports the Global Financing segment, and the filing discloses ongoing legal and regulatory matters including SEC and DOJ FCPA inquiries, an SEC revenue recognition investigation, and the Spanish and UK pension litigation.
02—Key points
Key Highlights
- Revenue fell 11.9% to $81.7B (about 1% decline adjusted for currency and divestitures), reflecting a $7.2B currency headwind and divestiture impacts.
- Diluted EPS from continuing operations fell 12.8% to $13.60; operating (non-GAAP) EPS was $14.92, down 9.7%.
- Strategic imperatives revenue grew 17% (26% adjusted) to $28.9B, about 35% of total revenue; cloud revenue reached $10.2B, making IBM the largest cloud provider per the filing.
- Operating cash flow of $17.0B and free cash flow of $13.1B (98% FCF realization versus income from continuing operations); $9.5B returned to shareholders.
- Global Services backlog of $121B (up 1% adjusted for currency); Systems Hardware revenue rose 8% adjusted despite a 24.2% reported decline, driven by z Systems growth of 35% adjusted.
- 2016 guidance: GAAP EPS of at least $12.45 and operating EPS of at least $13.50, with a currency impact of roughly $1.3B on pre-tax profit.
- Total debt of $39.9B, of which $27.2B supports Global Financing (leveraged at 7.3:1); the company has a $10B committed credit facility and an A+/AA-/Aa3 ratings profile.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2015, International Business Machines Corp kept $0.16.
- Revenue$81.74B100.0%
- Cost of revenue−$41.06B50.2%
- Gross profit$40.68B49.8%
- Operating costs−$27.32B33.4%
- Operating income$13.36B16.3%
- Interest, other & tax−$174.0M0.2%
- Net income$13.19B16.1%
Where FY2015 revenue went
$81.74B- Cost of revenue: $41.06B, 50% of revenue
- SG&A: $20.43B, 25% of revenue
- Net income: $13.19B, 16% of revenue
- R&D: $5.25B, 6.4% of revenue
- Other operating costs: $1.64B, 2.0% of revenue
Kept 16% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2015filed February 23, 2016Financial Statements
FY2015 against FY2014
| Line item | FY2015FY2014 | Change |
|---|---|---|
| Revenue | $81.74B$92.79B | −11.9% |
| Cost of Revenue | $41.06B$46.39B | −11.5% |
| Gross Profit | $40.68B$46.41B | −12.3% |
| R&D Expenses | $5.25B$5.44B | −3.5% |
| SG&A Expenses | $20.43B$23.18B | −11.9% |
| Operating Income | $13.36B— | — |
| Interest Expense | $468.00M$484.00M | −3.3% |
| Net Income | $13.19B$12.02B | +9.7% |
| EPS (Basic) | $13.48$11.97 | +12.6% |
| EPS (Diluted) | $13.42$11.90 | +12.8% |
| Shares Outstanding (Basic) | 978.74M1.00B | −2.5% |
| Shares Outstanding (Diluted) | 982.70M1.01B | −2.7% |
05—Questions
Frequently Asked Questions
Why did IBM's reported revenue drop so sharply in 2015 if the underlying business was roughly flat?
Reported revenue fell 11.9% to $81.7B. Roughly 8 percentage points came from currency translation (a stronger U.S. dollar, a $7.2B impact) and about 3 points from the divestitures of the System x server business and the customer care BPO business. Adjusted for both, revenue declined only about 1%, which management presents as a modest improvement in underlying trends.
Is IBM's shift toward cloud, analytics, mobile, social and security showing up in the numbers?
Yes, partly. The strategic imperatives generated $28.9B in 2015 (about 35% of revenue) and grew 17% as reported and 26% adjusted for currency and divestitures. Cloud revenue rose 43% as reported to $10.2B, and as-a-service revenue grew 50% to $4.5B. However, the traditional Global Services, Software and storage businesses declined, and management said cloud margins are currently diluted by investment and scale considerations.
Why did net income rise 9.7% while earnings from continuing operations fell 15.2%?
The difference comes from discontinued operations. In 2014 IBM recorded a $3.7B after-tax loss from discontinued operations, mainly a charge on the Microelectronics divestiture. In 2015 that loss shrank to $174 million, so net income of $13.2B rose even though income from continuing operations declined to $13.4B. Investors focused on operating performance should look at continuing operations and the non-GAAP operating earnings figure of $14.7B.
What are the main risks and open legal matters highlighted in the filing?
The filing describes several items: an SEC investigation into revenue recognition in the U.S., UK and Ireland (disclosed August 2015); an ongoing SEC and DOJ inquiry into FCPA compliance, including matters in Poland, Argentina, Bangladesh and Ukraine; securities and ERISA class actions tied to the Microelectronics divestiture announcement; pension litigation in Spain and the UK, where an adverse appeal outcome could cost roughly $250 million; and an IRS dispute over a 2011 internal restructuring. Risk factors also cover currency exposure, dependence on skilled personnel and critical suppliers, and cybersecurity.
06—Continue