01—Abstract
Summary
Summary of the 10-K filed February 27, 2018. Cited figures are marked; the original filing is the authoritative source.
IBM's 2017 Form 10-K reports total revenue of $79.1 billiona, down 1.0% as reported (1.3% adjusted for currency), with the decline concentrated in Global Business Services (-2.1%) and Technology Services & Cloud Platforms (-3.0%), while Systems (+6.2%) and Cognitive Solutions (+1.5%) grew.
Strategic imperatives (cloud, analytics, mobile, security) grew 11% to $36.5 billionb, and Total Cloud revenue reached $17.0 billion (+24%), with the as-a-Service exit run rate rising to $10.3 billion. Growth in the strategic areas did not fully offset traditional declines, and the company returned to revenue growth only in Q4 2017 (+3.6% as reported). Profitability was dominated by a one-time $5.5 billion charge tied to U.S. tax reform.
GAAP income from continuing operations fell 51.5% to $5.8 billionc, and diluted GAAP EPS was $6.14 versus $12.39 in 2016. Excluding the charge and non-operating items, operating (non-GAAP) EPS was $13.80, up 1.5%, while gross margin declined to 45.8% (47.4% operating) amid investment, mix, and higher retirement-related costs. Free cash flow was $13.0 billion, and the company returned $9.8 billion to shareholders through dividends and buybacks.
Balance sheet leverage increased: total debt rose $4.7 billion to $46.8 billiond, largely to support Global Financing (now housed in IBM Credit LLC, which made its first public bond issuance). Management guided to GAAP EPS of at least $11.70 and operating EPS of at least $13.80 for 2018, with free cash flow of about $12 billion. Key risks flagged include competitive pressure in traditional services, currency exposure (over 60% of revenue from outside the U.S.), cybersecurity, pension funding, and open tax examinations.
02—Key points
Key Highlights
- Revenue of $79.1B declined 1.0% (1.3% constant currency); Q4 2017 returned to growth at +3.6%
- Strategic imperatives grew 11% to $36.5B; Cloud revenue reached $17.0B, up 24%, with as-a-Service exit run rate of $10.3B
- GAAP EPS fell to $6.14 from $12.39 due to a $5.5B one-time U.S. tax reform charge; operating (non-GAAP) EPS rose 1.5% to $13.80
- Gross profit margin contracted 2.1 points to 45.8%, reflecting investment, mix, and higher retirement-related costs
- Free cash flow of $13.0B, up $1.3B; $9.8B returned to shareholders via $5.5B dividends and $4.3B buybacks
- Total debt rose $4.7B to $46.8B, with $31.4B supporting Global Financing (leveraged at 9.0x debt-to-equity)
- 2018 guidance: GAAP EPS of at least $11.70, operating EPS of at least $13.80, and free cash flow of about $12B
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2017, International Business Machines Corp kept $0.07.
- Revenue$79.14B100.0%
- Cost of revenue−$42.20B53.3%
- Gross profit$36.94B46.7%
- Operating costs−$31.18B39.4%
- Operating income$5.76B7.3%
- Interest, other & tax−$5.0M0.0%
- Net income$5.75B7.3%
Where FY2017 revenue went
$79.14B- Cost of revenue: $42.20B, 53% of revenue
- SG&A: $19.68B, 25% of revenue
- Net income: $5.75B, 7.3% of revenue
- R&D: $5.59B, 7.1% of revenue
- Other operating costs: $5.92B, 7.5% of revenue
Kept 7.3% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2017filed February 27, 2018Financial Statements
FY2017 against FY2016
| Line item | FY2017FY2016 | Change |
|---|---|---|
| Revenue | $79.14B$79.92B | −1.0% |
| Cost of Revenue | $42.20B$41.40B | +1.9% |
| Gross Profit | $36.94B$38.52B | −4.1% |
| R&D Expenses | $5.59B$5.73B | −2.4% |
| SG&A Expenses | $19.68B$20.87B | −5.7% |
| Operating Income | $5.76B$11.88B | −51.5% |
| Interest Expense | $615.00M$630.00M | −2.4% |
| Net Income | $5.75B$11.87B | −51.5% |
| EPS (Basic) | $6.17$12.43 | −50.4% |
| EPS (Diluted) | $6.14$12.38 | −50.4% |
| Shares Outstanding (Basic) | 932.83M955.42M | −2.4% |
| Shares Outstanding (Diluted) | 937.39M958.71M | −2.2% |
05—Questions
Frequently Asked Questions
Why did IBM's GAAP earnings fall so sharply in 2017?
GAAP income from continuing operations dropped 51.5% to $5.8B, primarily because of a one-time $5.5B charge from the enactment of U.S. tax reform (covering the transition tax on overseas profits and remeasurement of deferred tax assets). Excluding this charge and non-operating items, operating earnings declined only 0.7% to $12.9B, and operating EPS grew 1.5%.
Is IBM's core business growing?
Partially. Strategic areas such as cloud, security, analytics, and mobile grew 11% to $36.5B, and Systems grew 6.2% on the z14 mainframe cycle. However, traditional areas such as Infrastructure Services (-3.6%), Global Business Services (-2.1%), and transactional software offset much of that growth, leaving total revenue down 1.0%.
How is IBM's balance sheet and debt position changing?
Total debt increased $4.7B to $46.8B, and total equity fell to $17.7B, leaving the consolidated debt-to-capitalization ratio at 72.5% (including the tax charge's 5.7-point impact). Most debt supports the Global Financing business, which was reorganized into IBM Credit LLC and began issuing public debt in 2017. Management describes the balance sheet as strong with substantial liquidity.
What does IBM expect for 2018?
IBM guided to GAAP EPS of at least $11.70 and operating EPS of at least $13.80, expects revenue growth at mid-January spot rates with margin stabilization, and projects free cash flow of approximately $12 billion. The company also expects the operating tax rate to be about 16% (plus or minus 2 points) and pre-tax retirement-related plan cost of roughly $3.2B.
What are the key risks highlighted in the filing?
Key risks include declining demand in a downturn, execution on transformation and innovation initiatives, competition from larger and newer rivals, cybersecurity threats, currency and credit exposure in Global Financing, pension funding obligations, possible additional U.S. tax reform charges (about $110M expected in Q1 2018), and ongoing tax examinations and litigation, including the SCO and Indiana cases.
06—Continue