Why did IBM's GAAP EPS grow so much faster than operating EPS?

GAAP diluted EPS from continuing operations of $1.69 included a net benefit from discrete tax events, which lowered the GAAP tax provision to a benefit of $502 million (effective rate of -46.7%). Operating (non-GAAP) EPS of $1.68 excludes this tax benefit along with acquisition-related charges and retirement-related costs, so it better reflects underlying profitability, and it still grew 24% year over year.

What is the HashiCorp acquisition and how will it be financed?

IBM agreed to acquire HashiCorp, Inc. for $35 per share in cash, an enterprise value of $6.4 billion, to build an end-to-end hybrid cloud platform for AI. The filing does not specify the financing structure, but IBM's debt rose $3.0 billion in the quarter and its cash position was $19.3 billion, so the deal will likely add to leverage. The transaction requires HashiCorp shareholder approval and regulatory clearances and is expected to close by the end of 2024.

Is IBM's guidance changing for 2024?

No. IBM reiterated its full-year 2024 outlook: constant-currency revenue growth consistent with its mid-single-digit model and about $12 billion of free cash flow. Management expects currency to be a 1.5 to 2 point headwind to reported revenue growth at current exchange rates.

Which parts of the business are growing and which are weak?

Software (up 5.5%, up 5.9% at constant currency) was the main growth driver, with Automation up 13%, Red Hat up 9%, and Hybrid Infrastructure up 5%. Consulting was flat, and Infrastructure declined 0.7%, with Infrastructure Support down 8% and Data & AI up only 1%, while Security fell 3%.

What do the non-GAAP measures and adjusted EBITDA tell investors?

IBM uses operating (non-GAAP) results to exclude acquisition-related charges, non-acquired intangible amortization, and retirement-related costs, which it says improves comparability with peers. Adjusted EBITDA of $3.0 billion (up $0.2 billion) and free cash flow are management-defined measures that also exclude financing receivables changes, so investors should compare them with GAAP figures and the reconciliations in Exhibit 99.1.

IBM 8-K: Earnings & Results

01—Abstract

Summary

Summary of the 8-K filed April 24, 2024. Cited figures are marked; the original filing is the authoritative source.

IBM reported first-quarter 2024 results with revenue of $14.5 billion^a, up 1% (3% at constant currency), led by Software revenue growth of 5% (6% at constant currency).

GAAP gross profit margin expanded 80 basis points to 53.5%, and operating (non-GAAP) pre-tax margin rose 130 basis points to 11.5%. GAAP diluted EPS from continuing operations was $1.69^b, up 66%, though this figure benefited from a net tax benefit from discrete tax events; operating (non-GAAP) diluted EPS was $1.68, up 24%. Free cash flow reached $1.9 billion, up $0.6 billion year over year, and trailing-twelve-month free cash flow was $11.8 billion.

Management reiterated its full-year 2024 outlook: constant-currency revenue growth consistent with its mid-single-digit model, with currency expected to be a 1.5 to 2 point headwind, and about $12 billion^c in free cash flow. Consulting revenue was flat (up 2% at constant currency), and Infrastructure revenue declined 1% (flat at constant currency), with Infrastructure Support down 8%. Debt rose to $59.5 billion, up $3.0 billion since year-end 2023, while cash and marketable securities increased to $19.3 billion.

The release also announced IBM's intent to acquire HashiCorp, Inc. for $35^d per share in cash, an enterprise value of $6.4 billion, with closing expected by the end of 2024 subject to HashiCorp shareholder approval and regulatory approvals. Investors should weigh the strategic logic of building a hybrid cloud and AI platform against the price, the debt-funded nature of the deal, and integration and regulatory risk.

02—Key points

Key Highlights

Revenue of $14.5 billion, up 1% (3% at constant currency); Software up 5%, Consulting flat, Infrastructure down 1%
GAAP gross profit margin of 53.5% (up 80 bps); operating (non-GAAP) gross margin of 54.7% (up 100 bps)
Operating (non-GAAP) pre-tax margin of 11.5%, up 130 bps; GAAP pre-tax margin flat at 7.4%
GAAP diluted EPS from continuing operations of $1.69 (up 66%), aided by discrete tax benefits; operating diluted EPS of $1.68 (up 24%)
Free cash flow of $1.9 billion in Q1, up $0.6 billion; trailing-twelve-month free cash flow of $11.8 billion; FY2024 FCF target of about $12 billion reiterated
Announced intent to acquire HashiCorp for $35 per share in cash (enterprise value $6.4 billion), expected to close by end of 2024
Total debt rose to $59.5 billion (up $3.0 billion since year-end 2023), including $9.9 billion of IBM Financing debt

03—Questions

Frequently Asked Questions

Why did IBM's GAAP EPS grow so much faster than operating EPS?
GAAP diluted EPS from continuing operations of $1.69 included a net benefit from discrete tax events, which lowered the GAAP tax provision to a benefit of $502 million (effective rate of -46.7%). Operating (non-GAAP) EPS of $1.68 excludes this tax benefit along with acquisition-related charges and retirement-related costs, so it better reflects underlying profitability, and it still grew 24% year over year.
What is the HashiCorp acquisition and how will it be financed?
IBM agreed to acquire HashiCorp, Inc. for $35 per share in cash, an enterprise value of $6.4 billion, to build an end-to-end hybrid cloud platform for AI. The filing does not specify the financing structure, but IBM's debt rose $3.0 billion in the quarter and its cash position was $19.3 billion, so the deal will likely add to leverage. The transaction requires HashiCorp shareholder approval and regulatory clearances and is expected to close by the end of 2024.
Is IBM's guidance changing for 2024?
No. IBM reiterated its full-year 2024 outlook: constant-currency revenue growth consistent with its mid-single-digit model and about $12 billion of free cash flow. Management expects currency to be a 1.5 to 2 point headwind to reported revenue growth at current exchange rates.
Which parts of the business are growing and which are weak?
Software (up 5.5%, up 5.9% at constant currency) was the main growth driver, with Automation up 13%, Red Hat up 9%, and Hybrid Infrastructure up 5%. Consulting was flat, and Infrastructure declined 0.7%, with Infrastructure Support down 8% and Data & AI up only 1%, while Security fell 3%.
What do the non-GAAP measures and adjusted EBITDA tell investors?
IBM uses operating (non-GAAP) results to exclude acquisition-related charges, non-acquired intangible amortization, and retirement-related costs, which it says improves comparability with peers. Adjusted EBITDA of $3.0 billion (up $0.2 billion) and free cash flow are management-defined measures that also exclude financing receivables changes, so investors should compare them with GAAP figures and the reconciliations in Exhibit 99.1.

04—Continue

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