01—Abstract
Summary
Summary of the 10-K filed February 25, 2020. Cited figures are marked; the original filing is the authoritative source.
IBM's 2019 Form 10-K (filed February 25, 2020) reports a year dominated by the $34.8 billiona cash acquisition of Red Hat, which closed July 9, 2019.
Consolidated revenue fell 3.1% as reported (1% adjusted for currency) to $77.1 billionb, but rose 0.2% excluding divested businesses and currency. Gross margin improved 0.9 points to 47.3%, driven by higher-value mix and portfolio optimization. GAAP diluted EPS from continuing operations rose 11.1% to $10.57, while operating (non-GAAP) EPS fell 7.2% to $12.81 because of Red Hat purchase accounting, acquisition-related charges, and higher interest expense.
The 2018 comparison was also distorted by a $2.0 billionc U.S. tax reform charge, which explains much of the reported EPS increase and the sharp swing in the effective tax rate to 7.2%. The balance sheet and capital allocation were reshaped by the deal. Total debt rose $17.1 billion to $62.9 billion, goodwill and intangibles increased about $34 billion, and total equity rose to $21.0 billion.
Management suspended share repurchases at the Red Hat close to prioritize deleveraging, reduced debt by $10.1 billiond in the second half of 2019, and targeted a mid-to-high single-A credit rating within a couple of years. Moody's downgraded IBM's long-term rating from A1 to A2 following the deal. Free cash flow was $11.9 billion, flat year over year, while dividends of $5.7 billion were maintained.
Segment performance was mixed. Cloud & Cognitive Software grew 4.5% (6% at constant currency), with cloud revenue of $21.2 billion across IBM (27% of revenue), and Red Hat contributed to Cloud & Data Platforms growth of 10.4%. Global Technology Services declined 6.1%, reflecting lower client volumes in traditional labor-based managed services.
Systems fell 5.3% due to the z14-to-z15 product cycle and Power Systems weakness, though z15 drove strong fourth-quarter growth. Services backlog declined to $112.4 billion and total signings fell 8.9%. Management guided to 2020 GAAP EPS of at least $10.57, operating EPS of at least $13.35, and free cash flow of about $12.5 billion, with a GTS restructuring toward an asset-based model.
02—Key points
Key Highlights
- Revenue of $77.1 billion declined 3.1% as reported (-1.0% at constant currency), but rose 0.2% excluding divested businesses and currency, showing underlying stabilization.
- Red Hat acquisition ($34.8 billion cash consideration, closed July 9, 2019) drove goodwill up $22.0 billion and intangibles up $12.1 billion, and was dilutive to 2019 operating EPS due to purchase accounting, including a $2.2 billion deferred revenue adjustment.
- GAAP diluted EPS from continuing operations rose 11.1% to $10.57, but operating (non-GAAP) EPS fell 7.2% to $12.81; the 2018 base includes a $2.0 billion U.S. tax reform charge.
- Total debt rose $17.1 billion to $62.9 billion; IBM reduced debt by $10.1 billion in the second half of 2019 and suspended share repurchases, leaving about $2.0 billion of authorization unused.
- Free cash flow was $11.9 billion (flat year over year) and cash from operations was $14.8 billion, while $5.7 billion in dividends were paid and the quarterly dividend was raised to $1.62 per share.
- Segment divergence: Cloud & Cognitive Software (+4.5%) and Cloud & Data Platforms (+10.4%) grew, while Global Technology Services (-6.1%) and Systems (-5.3%) declined; services signings fell 8.9% and backlog to $112.4 billion.
- Leadership transition announced: Arvind Krishna becomes CEO effective April 6, 2020, with Jim Whitehurst as President and Virginia Rometty as Executive Chairman through 2020.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2019, International Business Machines Corp kept $0.16.
- Revenue$57.71B100.0%
- Cost of revenue−$26.18B45.4%
- Gross profit$31.53B54.6%
- Operating costs−$24.39B42.3%
- Operating income$7.15B12.4%
- Interest, other & tax$2.29B4.0%
- Net income$9.43B16.3%
Where FY2019 revenue went
$57.71B- Cost of revenue: $26.18B, 45% of revenue
- SG&A: $18.72B, 32% of revenue
- Operating income: $7.15B, 12% of revenue
- R&D: $5.91B, 10% of revenue
Kept 12% as operating income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2019filed February 25, 2020Financial Statements
FY2019 against FY2018
| Line item | FY2019FY2018 | Change |
|---|---|---|
| Revenue | $57.71B$79.59B | −27.5% |
| Cost of Revenue | $26.18B$42.66B | −38.6% |
| Gross Profit | $31.53B$36.94B | −14.6% |
| R&D Expenses | $5.91B$5.38B | +9.9% |
| SG&A Expenses | $18.72B$19.37B | −3.3% |
| Operating Income | $7.15B$8.72B | −18.1% |
| Interest Expense | $1.34B$723.00M | +85.9% |
| Net Income | $9.43B$8.73B | +8.1% |
| EPS (Basic) | $10.63$9.57 | +11.1% |
| EPS (Diluted) | $10.56$9.52 | +10.9% |
| Shares Outstanding (Basic) | 887.24M912.05M | −2.7% |
| Shares Outstanding (Diluted) | 892.81M916.32M | −2.6% |
05—Questions
Frequently Asked Questions
Why did IBM's operating EPS decline while GAAP EPS increased in 2019?
GAAP EPS rose to $10.57 mainly because 2018 included a $2.0 billion (about $2.23 per share) U.S. tax reform charge that did not recur. Operating EPS excludes acquisition-related charges, intangible amortization, and retirement-related costs, and fell to $12.81 (down 7.2%) because of Red Hat's dilutive purchase accounting, higher interest expense on acquisition debt, and increased operating spending.
How did the Red Hat acquisition change IBM's financial profile?
The $34.8 billion cash deal was funded with cash and debt, lifting total debt to $62.9 billion and goodwill to $58.2 billion. It strengthened IBM's hybrid cloud position, with cloud revenue reaching $21.2 billion (27% of revenue), but it pressured near-term margins and earnings and led Moody's to downgrade IBM's rating to A2.
What is IBM's guidance for 2020?
IBM expects 2020 GAAP EPS from continuing operations of at least $10.57 and operating EPS of at least $13.35, free cash flow of about $12.5 billion, revenue growth of roughly 3% (including about 1 point of impact from 2019 divestitures), and a GAAP effective tax rate of about 3% to 6%. It also expects to resume pursuing a mid-to-high single-A credit rating and includes structural actions primarily in GTS.
Why are investors concerned about the Global Technology Services and Systems segments?
GTS revenue fell 6.1% as reported (4% at constant currency) on lower client volumes in labor-based managed services, and total services signings dropped 8.9%. Systems revenue fell 5.3%, with Power Systems down 13.5%, though z15 mainframe shipments produced strong fourth-quarter growth and improved Systems gross margin to 53.1%.
What are the main risks highlighted in the filing?
Key risks include reduced client IT spending in an economic downturn, execution on internal transformation and innovation initiatives, cybersecurity and data privacy regulation, currency and global macroeconomic exposure (over 60% of revenue from outside the U.S.), acquisition integration (notably Red Hat), tax uncertainty (unrecognized tax benefits of $7.1 billion), and pension funding obligations (underfunded position of about $18 billion including nonqualified and non-U.S. plans).
06—Continue