10-QPeriod: Q1 FY2016

INTERNATIONAL BUSINESS MACHINES CORP Quarterly Report for Q1 Ended Mar 31, 2016

Filed April 26, 2016For Securities:IBM

Summary

IBM's first quarter 2016 earnings report indicates a challenging quarter with a notable decline in net income and revenue compared to the previous year. Total revenue decreased by 4.6% to $18.7 billion, and net income fell 13.5% to $2.0 billion. This performance was primarily attributed to increased investments in strategic growth areas, workforce rebalancing charges, and currency headwinds. The company's strategic imperatives, including cloud, analytics, mobile, social, and security solutions, continued to show strong growth, increasing 14% and representing 37% of total revenue, highlighting IBM's ongoing transformation efforts. Despite the overall revenue and profit decline, IBM generated a significant increase in cash flow from operations, up 56% to $5.6 billion, largely due to a substantial tax refund and lower tax payments. The company also made significant strategic acquisitions, notably The Weather Company (TWC), to bolster its cloud and cognitive capabilities. While the reported results reflect investments and restructuring, the forward-looking outlook for 2016 suggests management's confidence in continued transformation, with revised expectations for GAAP earnings per share and operating earnings, and an expectation to be at the high end of the free cash flow range.

Financial Highlights

52 data points
Beta

Revenue

$18.68B

46.5% Gross Margin

Net Income

$2.01B

10.8% Net Margin

EPS (Diluted)

$2.09

Total Assets

$118.86B

Cash & Equivalents

$14.35B

Free Cash Flow

$4.57B

Financial Statements
Beta
Revenue$18.68B
Cost of Revenue$10.00B
Gross Profit$8.69B
R&D Expenses$1.46B
SG&A Expenses$6.01B
Operating Income$2.02B
Interest Expense$147.00M
Net Income$2.01B
EPS (Basic)$2.09
EPS (Diluted)$2.09
Shares Outstanding (Basic)961.70M
Shares Outstanding (Diluted)964.40M

Key Highlights

  • 1Total revenue decreased 4.6% year-over-year to $18.7 billion.
  • 2Net income from continuing operations declined 16.5% to $2.0 billion.
  • 3Strategic imperatives (cloud, analytics, mobile, social, security) revenue grew 14% and represented 37% of total revenue.
  • 4Cloud revenue increased 34% and had an as-a-Service revenue run rate of $5.4 billion.
  • 5Cash flow from operating activities increased significantly by 56% to $5.6 billion, driven by a tax refund and lower tax payments.
  • 6Significant acquisitions were completed, including The Weather Company (TWC) for $2.3 billion, strengthening cloud and cognitive offerings.
  • 7Increased workforce rebalancing charges of $998 million impacted expenses, reflecting investments in business transformation.

Frequently Asked Questions

The decline in net income and revenue was primarily driven by increased investments in strategic growth areas such as cloud and analytics, significant workforce rebalancing charges aimed at accelerating business transformation, and unfavorable currency fluctuations. The company also saw a decline in its legacy Transaction Processing Software and a challenging product cycle for z Systems hardware.

IBM is heavily investing in and growing its strategic imperatives, which include cloud, analytics, mobile, social, and security solutions. In Q1 2016, these areas grew 14% and accounted for 37% of total revenue. The company is also making strategic acquisitions, such as The Weather Company, and expanding its Watson capabilities to strengthen its cognitive solutions and cloud platform offerings.

IBM revised its 2016 outlook, now expecting GAAP earnings per share from continuing operations of at least $12.35 and operating (non-GAAP) earnings per share of at least $13.50. The company also anticipates free cash flow to be at the high end of the $11 billion to $12 billion range, reflecting confidence in its transformation efforts and continued strong performance in strategic imperatives.

IBM generated a strong increase in cash flow from operating activities, up 56% to $5.6 billion, mainly due to a significant tax refund and lower tax payments. The company's cash and marketable securities increased to $14.9 billion. Total debt increased due to new debt issuances, supporting investments and acquisitions, while total equity also saw a modest increase.