IBM Reports 2014 Second-Quarter Results

IBM (NYSE:IBM)

• Diluted EPS:
  • GAAP: $4.12, up 42 percent;
  • Operating (non-GAAP): $4.32, up 34 percent;
• Net income:
  • GAAP: $4.1 billion, up 28 percent;
  • Operating (non-GAAP): $4.3 billion, up 21 percent;
• Gross profit margin:
  • GAAP: 49.1 percent, up 50 basis points;
  • Operating (non-GAAP): 49.8 percent, up 10 basis points;
• Revenue: $24.4 billion:
  • Down 2 percent; down 1 percent adjusting for divested customer care outsourcing business;
  • Software, Services adjusting for divested customer care outsourcing business and Global Financing grew; Systems and Technology declined;
• Services backlog of $136 billion, down 1 percent adjusting for divested customer care outsourcing business;
• Strategic growth initiatives grew double digits:
  • Cloud revenue up more than 50 percent year-to-date;
    • For cloud delivered as a service, second-quarter annual run rate up nearly 100 percent to $2.8 billion year-to-year;
  • Business analytics revenue up 7 percent year-to-date;

  • Mobile revenue up more than 100 percent year-to-date;

  • Security revenue up more than 20 percent year-to-date;
• Continue to expect full-year operating (non-GAAP) EPS of at least $18.00.

IBM (NYSE:IBM) today announced second-quarter 2014 diluted earnings of $4.12 per share, compared with diluted earnings of $2.91 per share in the second quarter of 2013, an increase of 42 percent. Operating (non-GAAP) diluted earnings were $4.32 per share, compared with operating diluted earnings of $3.22 per share in the second quarter of 2013, an increase of 34 percent.

Second-quarter net income was $4.1 billion compared with $3.2 billion in the second quarter of 2013, an increase of 28 percent. Operating (non-GAAP) net income was $4.3 billion compared with $3.6 billion in the second quarter of 2013, an increase of 21 percent. The year-to-year results include the impact of a charge in the prior year period of $1 billion for workforce rebalancing.

Total revenues for the second quarter of 2014 of $24.4 billion were down 2 percent (down 1 percent, as reported and adjusting for currency, adjusting for the divested customer care outsourcing business) from the second quarter of 2013.

"In the second quarter, we made further progress on our transformation. We performed well in our strategic imperatives around cloud, big data and analytics, security and mobile,” said Ginni Rometty, IBM chairman, president and chief executive officer. "We will continue to extend and leverage our unique strengths to address the emerging trends in enterprise IT and transform our business, positioning ourselves for growth over the long term.”

Second-Quarter GAAP – Operating (non-GAAP) Reconciliation

Second-quarter operating (non-GAAP) diluted earnings exclude $0.20 per share of charges: $0.16 per share for the amortization of purchased intangible assets and other acquisition-related charges, and $0.04 per share for non-operating retirement-related charges driven by changes to plan assets and liabilities primarily related to market performance.

Full-Year 2014 Expectations

IBM expects full-year 2014 GAAP diluted earnings per share of at least $17.00, and operating (non-GAAP) diluted earnings per share of at least $18.00. The 2014 operating (non-GAAP) earnings expectations exclude $1.00 per share of charges for amortization of purchased intangible assets, other acquisition-related charges, and retirement-related charges.

Geographic Regions

The Americas’ second-quarter revenues were $10.6 billion, a decrease of 1 percent (up 1 percent, adjusting for currency) from the 2013 period. Revenues from Europe/Middle East/Africa were up 1 percent at $7.9 billion (down 3 percent adjusting for currency). Asia-Pacific revenues decreased 9 percent (down 6 percent adjusting for currency) to $5.3 billion. OEM revenues were $433 million, down 19 percent (down 19 percent adjusting for currency) compared with the 2013 second quarter.

Growth Markets

Revenues from the company’s growth markets were down 7 percent (down 4 percent, adjusting for currency). Revenues in the BRIC countries — Brazil, Russia, India and China — were down 2 percent (up 1 percent, adjusting for currency).

Services

Global Services segment revenues decreased 1 percent (down 1 percent, adjusting for currency) to $13.9 billion. Revenues increased 1 percent adjusting for the impact of the divested customer care outsourcing business. Global Technology Services segment revenues decreased 1 percent (down 1 percent, adjusting for currency) to $9.4 billion. Adjusting for the impact of the divested customer care outsourcing business, revenues were up 2 percent (up 2 percent adjusting for currency). Global Business Services segment revenues were down 2 percent (down 2 percent, adjusting for currency) to $4.5 billion.

Pre-tax income from Global Technology Services increased 22 percent and pre-tax margin increased to 19.2 percent, including the impact of a $0.4 billion workforce rebalancing charge in the prior year. Global Business Services pre-tax income increased 34 percent and pre-tax margin increased to 17.8 percent, including the impact of a $0.2 billion workforce rebalancing charge in the prior year.

The estimated services backlog at June 30 was $136 billion, down 1 percent adjusting for the divested customer care outsourcing business (down 3 percent adjusting for currency).

Software

Revenues from the Software segment were $6.5 billion, up 1 percent (flat adjusting for currency) compared with the second quarter of 2013. Software pre-tax income increased 10 percent and pre-tax margin increased to 36.5 percent, including the impact of a $0.2 billion workforce rebalancing charge in the prior year.

Revenues from IBM’s key middleware products, which include WebSphere, Information Management, Tivoli, Workforce Solutions and Rational products, were $4.3 billion, up 1 percent (flat adjusting for currency) versus the second quarter of 2013. Operating systems revenues of $530 million were down 13 percent (down 13 percent, adjusting for currency) compared with the prior-year quarter.

Financing

Global Financing segment revenues increased 4 percent (up 4 percent, adjusting for currency) in the second quarter at $504 million. Pre-tax income for the segment increased 8 percent to $593 million.

Hardware

Revenues from the Systems and Technology segment totaled $3.3 billion for the quarter, down 11 percent (down 12 percent, adjusting for currency) from the second quarter of 2013. Systems and Technology segment pre-tax income increased $0.2 billion, including the impact of a $0.2 billion workforce rebalancing charge in the prior year.

Total systems revenues decreased 11 percent (down 11 percent, adjusting for currency). Revenues from System z mainframe server products, in the seventh quarter since they were announced, decreased 1 percent compared with the year-ago period. Total delivery of System z computing power, as measured in MIPS (millions of instructions per second), was flat. Revenues from Power Systems were down 28 percent compared with the 2013 period. Revenues from System x were down 3 percent. Revenues from System Storage decreased 12 percent and within this business area, flash storage grew more than 100 percent. Revenues from Microelectronics OEM decreased 18 percent.

Gross Profit

The company’s total gross profit margin was 49.1 percent in the 2014 second quarter compared with 48.7 percent in the 2013 second-quarter period. Total operating (non-GAAP) gross profit margin was 49.8 percent in the 2014 second quarter compared with 49.7 percent in the 2013 second-quarter period, with increases in Global Technology Services and Global Financing.

Expense

Total expense and other income decreased to $6.8 billion or 15 percent, including a gain of $121 million from the divestiture of the customer care outsourcing business and the impact of a $1.0 billion workforce rebalancing charge in the prior year period. S,G&A expense of $5.6 billion decreased 16 percent year over year. R,D&E expense of $1.5 billion decreased 6 percent compared with the year-ago period, and was 6 percent of revenue, consistent with the second-quarter of 2013. Intellectual property and custom development income decreased to $191 million compared with $247 million a year ago. Other (income) and expense was income of $201 million compared with prior-year income of $91 million. Interest expense increased to $136 million compared with $98 million in the prior year.

Total operating (non-GAAP) expense and other income decreased 14 percent to $6.7 billion compared with the prior-year period, including the impact of a $1.0 billion workforce rebalancing charge in the prior year period. Operating (non-GAAP) S,G&A expense decreased 16 percent to $5.5 billion compared with the prior-year period. Operating (non-GAAP) R,D&E expense of $1.5 billion was down 4 percent compared with the year-ago period.

Pre-Tax Income

Pre-tax income increased 25 percent to $5.2 billion and pre-tax margin of 21.2 percent was up 4.6 points compared with the prior-year period. Operating (non-GAAP) pre-tax income increased 18 percent to $5.4 billion and pre-tax margin was 22.3 percent, up 3.9 points.

***

IBM’s tax rate was 20.0 percent, down 2.1 points year over year; operating (non-GAAP) tax rate was 20.0 percent, down 2.0 points compared to the year-ago period.

Net income margin increased 4.0 points to 17.0 percent. Total operating (non-GAAP) net income margin increased 3.5 points to 17.8 percent.

The weighted-average number of diluted common shares outstanding in the second-quarter 2014 was 1.01 billion compared with 1.11 billion shares in the same period of 2013. As of June 30, 2014, there were 998 million basic common shares outstanding.

Debt, including Global Financing, totaled $46.5 billion, compared with $39.7 billion at year-end 2013. From a management segment view, Global Financing debt totaled $29.4 billion versus $27.5 billion at year-end 2013, resulting in a debt-to-equity ratio of 7.1 to 1. Non-global financing debt totaled $17.1 billion, an increase of $4.9 billion since year-end 2013, resulting in a debt-to-capitalization ratio of 56.1, essentially flat quarter-to-quarter and higher than the ratio at year-end 2013.

IBM ended the second-quarter 2014 with $9.7 billion of cash on hand and generated free cash flow of $3.0 billion, excluding Global Financing receivables, up $0.3 billion year over year. The company returned $4.8 billion to shareholders through $1.1 billion in dividends and $3.7 billion of gross share repurchases.

Year-To-Date 2014 Results

Net income for the six months ended June 30, 2014 was $6.5 billion compared with $6.3 billion in the year-ago period, an increase of 4 percent. Diluted earnings per share were $6.37 compared with $5.60 per diluted share for the 2013 period, an increase of 14 percent. Revenues for the six-month period totaled $46.8 billion, a decrease of 3 percent (down 2 percent, adjusting for currency) compared with $48.3 billion for the first six months of 2013.

Operating (non-GAAP) net income for the six months ended June 30, 2014 was $7.0 billion, flat year to year. Operating (non-GAAP) diluted earnings per share were $6.82 compared with $6.23 per diluted share for the 2013 period, an increase of 9.5 percent.

Forward-Looking and Cautionary Statements

Except for the historical information and discussions contained herein, statements contained in this release may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based on the company’s current assumptions regarding future business and financial performance. These statements involve a number of risks, uncertainties and other factors that could cause actual results to differ materially, including the following: a downturn in economic environment and client spending budgets; the company’s failure to meet growth and productivity objectives, a failure of the company’s innovation initiatives; risks from investing in growth opportunities; failure of the company’s intellectual property portfolio to prevent competitive offerings and the failure of the company to obtain necessary licenses; cybersecurity and privacy considerations; fluctuations in financial results, impact of local legal, economic, political and health conditions; adverse effects from environmental matters, tax matters and the company’s pension plans; ineffective internal controls; the company’s use of accounting estimates; the company’s ability to attract and retain key personnel and its reliance on critical skills; impacts of relationships with critical suppliers and business with government clients; currency fluctuations and customer financing risks; impact of changes in market liquidity conditions and customer credit risk on receivables; reliance on third party distribution channels; the company’s ability to successfully manage acquisitions, alliances and dispositions; risks from legal proceedings; risk factors related to IBM securities; and other risks, uncertainties and factors discussed in the company’s Form 10-Qs, Form 10-K and in the company’s other filings with the U.S. Securities and Exchange Commission (SEC) or in materials incorporated therein by reference. Any forward-looking statement in this release speaks only as of the date on which it is made. The company assumes no obligation to update or revise any forward-looking statements.

Presentation of Information in this Press Release

In an effort to provide investors with additional information regarding the company’s results as determined by generally accepted accounting principles (GAAP), the company has also disclosed in this press release the following non-GAAP information which management believes provides useful information to investors:

IBM results and expectations --

• presenting operating (non-GAAP) earnings per share amounts and related income statement items;
• presenting non-global financing debt-to-capitalization ratio;
• adjusting for free cash flow;
• adjusting for currency (i.e., at constant currency);
• adjusting for the divestiture of the customer care outsourcing business.

The rationale for management’s use of non-GAAP measures is included as part of the supplemental materials presented within the second-quarter earnings materials. These materials are available via a link on the IBM investor relations Web site at www.ibm.com/investor and are being included in Attachment II ("Non-GAAP Supplemental Materials”) to the Form 8-K that includes this press release and is being submitted today to the SEC.

Conference Call and Webcast

IBM’s regular quarterly earnings conference call is scheduled to begin at 4:30 p.m. EDT, today. The Webcast may be accessed via a link at http://www.ibm.com/investor/events/earnings/2q14.html. Presentation charts will be available shortly before the Webcast.

Financial Results Below (certain amounts may not add due to use of rounded numbers; percentages presented are calculated from the underlying whole-dollar amounts).

* Includes amortization of acquired intangible assets and other acquisition-related charges.
** Includes retirement-related items driven by changes to plan assets and liabilities primarily related to market performance.
*** Tax impact on operating (non-GAAP) pre-tax income is calculated under the same accounting principles applied to the GAAP pre-tax income which employs an annual effective tax rate method to the results.

* Includes amortization of acquired intangible assets and other acquisition-related charges.
** Includes retirement-related items driven by changes to plan assets and liabilities primarily related to market performance.
*** Tax impact on operating (non-GAAP) pre-tax income is calculated under the same accounting principles applied to the GAAP pre-tax income which employs an annual effective tax rate method to the results.