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IBM Reports 2020 Fourth-Quarter and Full-Year Results

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Strong hybrid cloud adoption; Gross margin expansion; Solid cash generation

IBM today announced fourth-quarter and full-year 2020 earnings results.

“We made progress in 2020 growing our hybrid cloud platform as the foundation for our clients’ digital transformations while dealing with the broader uncertainty of the macro environment." said Arvind Krishna, IBM chairman and chief executive officer.  "The actions we are taking to focus on hybrid cloud and AI will take hold, giving us confidence we can achieve revenue growth in 2021.”

Highlights

Fourth Quarter:

  • GAAP EPS from continuing operations of $1.41; Operating (non-GAAP) EPS of $2.07

--  EPS includes the impact of a pre-tax charge of more than $2.0 billion for structural actions in the fourth quarter

  • Revenue of $20.4 billion, down 6 percent (down 8 percent adjusting for divested businesses and currency)
  • Total cloud revenue of $7.5 billion, up 10 percent (up 8 percent adjusting for divested businesses and currency)
  • Red Hat revenue up 19 percent (up 17 percent adjusting for currency), normalized for historical comparability
  • GAAP gross profit margin of 51.7 percent, up 70 basis points; Operating (non-GAAP) gross profit margin of 52.5 percent, up 70 basis points
  • Debt reduced by $3.9 billion since end of third quarter

Full Year:

  • GAAP EPS from continuing operations of $6.13; Operating (non-GAAP) EPS of $8.67
  • Revenue of $73.6 billion, down 5 percent (down 4 percent adjusting for divested businesses and currency)
  • Total cloud revenue of $25.1 billion, up 19 percent (up 20 percent adjusting for divested businesses and currency)
  • Red Hat revenue up 18 percent, normalized for historical comparability
  • GAAP gross profit margin up 100 basis points; operating (non-GAAP) gross profit margin up 130 basis points
  • Net cash from operating activities of $18.2 billion; free cash flow of $10.8 billion
  • Cash on hand of $14.3 billion; debt reduced by more than $11 billion since closing the Red Hat acquisition
               
   

FOURTH QUARTER 2020
   

Results include the impact of $2.04 billion pre-tax charge
                     

Pre-tax

  

Gross

  
     

Diluted

    

Net

    

Pre-tax

  

Income

  

Profit

  
     

EPS *

    

Income *

    

Income *

  

Margin *

  

Margin

  

GAAP from Continuing Operations

  

$

1.41

  

$

1.3B

  

$

1.3B

  

6.3

%

51.7

%

Year/Year

    

(66)

%

  

(66)

%

  

(68)

%

(12.0)

Pts

0.7

Pts
                             

Operating (Non-GAAP)

  

$

2.07

  

$

1.9B

  

$

2.1B

  

10.2

%

52.5

%

Year/Year

    

(56)

%

  

(56)

%

  

(56)

%

(11.4)

Pts

0.7

Pts

* Results include the impact of pre-tax charge of $2.04 billion for structural actions in the fourth quarter.
“In 2020 we increased investment in our business across R&D and CAPEX, and since October, announced the acquisition of seven companies focused on hybrid cloud and AI," said James Kavanaugh, IBM senior vice president and chief financial officer.  "With solid cash generation, steadily expanding gross profit margins, disciplined financial management and ample liquidity, we are well positioned for success as the leading hybrid cloud platform company.”

Cash Flow and Balance Sheet

In the fourth quarter, the company generated net cash from operating activities of $5.9 billion, or $6.8 billion excluding Global Financing receivables.  IBM’s free cash flow was $6.1 billion.  The company returned $1.5 billion to shareholders in dividends.

For the full year, the company generated net cash from operating activities of $18.2 billion, or $13.8 billion excluding Global Financing receivables.  Net capital expenditures of $3 billion increased $0.7 billion, primarily for cloud infrastructure.  Free cash flow was $10.8 billion. IBM returned $5.8 billion to shareholders in dividends.

IBM ended the fourth quarter with $14.3 billion of cash on hand, which includes marketable securities, up $5.3 billion from year-end 2019. Debt, including Global Financing debt of $21.2 billion, totaled $61.5 billion, down $3.9 billion since the end of the third quarter, and down $11.5 billion since closing the Red Hat acquisition.

Segment Results for Fourth Quarter

Segment pre-tax results reflect the impact of the $2.04 billion pre-tax charge for structural actions in the fourth quarter.

  • Cloud & Cognitive Software (includes Cloud & Data Platforms which includes Red Hat, Cognitive Applications and Transaction Processing Platforms) — revenues of $6.8 billion, down 4.5 percent (down 6.6 percent adjusting for currency).  Cloud & Data Platforms grew 9 percent (up 6 percent adjusting for currency) led by Red Hat.  Cognitive Applications revenue was flat (down 2 percent adjusting for currency), with growth in Security and IoT.  Transaction Processing Platforms declined 24 percent (down 26 percent adjusting for currency).  Cloud revenue up 39 percent (up 36 percent adjusting for currency).  Gross profit margin up 20 basis points.
  • Global Business Services (includes Consulting, Application Management and Global Process Services) — revenues of $4.2 billion, down 2.7 percent (down 5.2 percent adjusting for currency), driven by declines in Application Management and Consulting. Global Process Services revenue grew.  Cloud revenue up 16 percent (up 14 percent adjusting for currency).  Gross profit margin up 260 basis points.
  • Global Technology Services (includes Infrastructure & Cloud Services and Technology Support Services) — revenues of $6.6 billion, down 5.5 percent (down 7.8 percent adjusting for currency). Cloud revenue up 4 percent (up 1 percent adjusting for currency).  Gross profit margin up 70 basis points.
  • Systems (includes Systems Hardware and Operating Systems Software) — revenues of $2.5 billion, down 17.8 percent (down 19.4 percent adjusting for currency), as a result of declines in all Systems Hardware platforms, reflecting the impact of product cycle dynamics.  Cloud revenue down 18 percent (down 19 percent adjusting for currency).  Gross profit margin up 380 basis points.
  • Global Financing (includes financing and used equipment sales) — revenues of $286 million, down 4.8 percent (down 6.0 percent adjusting for currency), reflecting the wind-down of OEM commercial financing.​

Full-year 2020 Results

Full-year results reflect transaction-related impacts associated with the Red Hat acquisition, which closed in July 2019, and the impact of the $2.04 billion pre-tax charge for structural actions in the fourth quarter.

Diluted earnings per share from continuing operations was $6.13 compared to $10.57 in 2019, a decrease of 42 percent.  Net income from continuing operations was $5.5 billion, down 42 percent year to year.  Revenues for the full year 2020 totaled $73.6 billion, a decrease of 4.6 percent year to year (down 3.5 percent adjusting for divested businesses and currency) compared with $77.1 billion for the full year 2019.

Operating (non-GAAP) diluted earnings per share from continuing operations was $8.67 compared with $12.81 per diluted share for 2019, a decrease of 32 percent.  Operating (non-GAAP) net income for the full year ended December 31, 2020 was $7.8 billion compared with $11.4 billion in the prior-year period, a decrease of 32 percent.

FULL YEAR 2020
   

Results include the impact of $2.04 billion pre-tax charge
                     

Pre-tax

  

Gross

  
     

Diluted

    

Net

    

Pre-tax

  

Income

  

Profit

  
     

EPS *

    

Income *

    

Income *

  

Margin *

  

Margin

  

GAAP from Continuing Operations

  

$

6.13

**

$

5.5B

**

$

4.6B

  

6.3

%

48.3

%

Year/Year

    

(42)

%

  

(42)

%

  

(54)

%

(6.9)

Pts

1.0

Pts
                             

Operating (Non-GAAP)

  

$

8.67

  

$

7.8B

  

$

7.7B

  

10.4

%

49.3

%

Year/Year

    

(32)

%

  

(32)

%

  

(39)

%

(5.8)

Pts

1.3

Pts

* Results include the impact of pre-tax charge of $2.04 billion for structural actions in the fourth quarter.

** Consolidated diluted earnings per share was $6.23 compared to $10.56 in 2019, a decrease of 41 percent. Consolidated net income was $5.6 billion, down 41 percent year to year.
Full-Year 2021 Expectations
The company expects to grow revenue for the full year 2021 based on the current foreign exchange rates.  The company also expects adjusted free cash flow of $11 billion to $12 billion in 2021. Adjusted free cash flow excludes approximately $3 billion of cash impacts from the company’s structural actions initiated in the fourth quarter of 2020 and the transaction costs associated with the separation of the managed infrastructure services business.
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