Strong Cloud Revenue Growth; Gross Margin Expansion; Solid Balance Sheet and Liquidity Position
IBM today announced third-quarter 2020 earnings results.
“The strong performance of our cloud business, led by Red Hat, underscores the growing client adoption of our open hybrid cloud platform," said Arvind Krishna, IBM chief executive officer. "Separating the managed infrastructure services business creates a market-leading standalone company and further sharpens our focus on IBM's open hybrid cloud platform and AI capabilities. This will accelerate our growth strategy and better position IBM to seize the $1 trillion hybrid cloud opportunity.”
Highlights for the third quarter include:
- GAAP EPS from continuing operations of $1.89
- Operating (non-GAAP) EPS of $2.58
- Revenue of $17.6 billion, down 2.6 percent (down 3.1 percent adjusting for divested businesses and currency)
-- Cloud & Cognitive Software revenue up 7 percent (up 6 percent adjusting for currency) - Total cloud revenue of $6.0 billion, up 19 percent
-- Total cloud revenue of $24.4 billion over the last 12 months, up 22 percent (up 25 percent adjusting for divested businesses and currency) - Red Hat revenue up 17 percent (up 16 percent adjusting for currency), normalized for historical comparability
- GAAP gross profit margin of 48 percent, up 180 basis points; Operating (non-GAAP) gross profit margin of 49 percent, up 160 basis points
- Net cash from operating activities of $15.8 billion and free cash flow of $10.8 billion, over the last 12 months
|
THIRD QUARTER 2020 |
||||||||||||||
|
Pre-tax |
Gross |
|||||||||||||
|
Diluted |
Net |
Pre-tax |
Income |
Profit |
||||||||||
|
EPS |
Income |
Income |
Margin |
Margin |
||||||||||
|
GAAP from Continuing Operations |
$1.89 |
$1.7B |
$1.8B |
10.4% |
48.0% |
|||||||||
|
Year/Year |
1% |
2% |
20% |
2.0Pts |
1.8Pts |
|||||||||
|
Operating (Non-GAAP) |
$2.58 |
$2.3B |
$2.6B |
14.7% |
49.0% |
|||||||||
|
Year/Year |
(4)% |
(3)% |
8% |
1.4Pts |
1.6Pts |
|||||||||
“In the third quarter we continued to deliver strong gross profit margin expansion, generated solid free cash flow and maintained a sound capital structure with ample liquidity," said James Kavanaugh, IBM senior vice president and chief financial officer. "We have the necessary financial flexibility to increase our investments in hybrid cloud and AI technology innovation and skills, while remaining committed to our long-standing dividend policy.”
Cash Flow and Balance Sheet
In the third quarter, the company generated net cash from operating activities of $4.3 billion, or $1.9 billion excluding Global Financing receivables. IBM’s free cash flow was $1.1 billion. The company returned $1.5 billion to shareholders in dividends.
IBM ended the third quarter with $15.8 billion of cash on hand which includes marketable securities, up $6.7 billion from year-end 2019. Debt, including Global Financing debt of $20.9 billion, totaled $65.4 billion.
Segment Results for Third Quarter
Segment results reflect growing adoption of IBM's open hybrid cloud platform while clients continue to shift priorities to preserve cash and maintain operational stability.
- Cloud & Cognitive Software (includes Cloud & Data Platforms which includes Red Hat, Cognitive Applications and Transaction Processing Platforms) — revenues of $5.6 billion, up 7 percent (up 6 percent adjusting for currency). Cloud & Data Platforms, grew 20 percent (up 19 percent adjusting for currency) led by Red Hat. Cognitive Applications grew 1 percent (flat adjusting for currency), led by Security and Supply Chain. Transaction Processing Platforms declined. Cloud revenue grew more than 60 percent.
- Global Business Services (includes Consulting, Application Management and Global Process Services) — revenues of $4.0 billion, down 5 percent (down 6 percent adjusting for currency), driven by declines in Application Management and Consulting. Cloud revenue up 10 percent (up 9 percent adjusting for currency). Gross profit margin up 190 basis points.
- Global Technology Services (includes Infrastructure & Cloud Services and Technology Support Services) — revenues of $6.5 billion, down 4 percent. Cloud revenue up 9 percent (up 8 percent adjusting for currency).
- Systems (includes Systems Hardware and Operating Systems Software) — revenues of $1.3 billion, down 15 percent (down 16 percent adjusting for currency), driven by declines in IBM Z and Storage Systems, reflecting the impact of product cycle dynamics.
- Global Financing (includes financing and used equipment sales) — revenues of $273 million, down 20 percent, reflecting the wind-down of OEM commercial financing. Gross profit margin up 60 basis points.
Year-To-Date 2020 Results
Year-to-date results reflect transaction-related impacts associated with the Red Hat acquisition, which closed in July 2019.
Consolidated diluted earnings per share was $4.72 compared with $6.45 per diluted share for the 2019 period, a decrease of 27 percent. Consolidated net income was $4.2 billion, down 27 percent year to year. Revenues for the nine-month period ended September 30, 2020 totaled $53.3 billion, a decrease of 4 percent year to year (down 2 percent adjusting for divested businesses and currency) compared with $55.4 billion for the first nine months of 2019.
Operating (non-GAAP) diluted earnings per share from continuing operations was $6.60 compared with $8.10 per diluted share for the 2019 period, a decrease of 19 percent. Operating (non-GAAP) net income for the nine months ended September 30, 2020 was $5.9 billion compared with $7.2 billion in the prior-year period, a decrease of 18 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, but not limited to, 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; damage to the company’s reputation; 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 data privacy considerations; fluctuations in financial results; the possibility that the proposed separation of the managed infrastructure services unit of the company’s Global Technology Services segment will not be completed within the anticipated time period or at all, the possibility of disruption or unanticipated costs in connection with the proposed separation or the possibility that the separation will not achieve its intended benefits; impact of local legal, economic, political, health and other conditions; adverse effects from environmental matters, tax matters and the company’s pension plans; ineffective internal controls; the company’s use of accounting estimates; impairment of the company’s goodwill or amortizable intangible assets; the company’s ability to attract and retain key employees and its reliance on critical skills; impacts of relationships with critical suppliers; product quality issues; impacts of 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 and ecosystems; the company’s ability to successfully manage acquisitions, alliances and dispositions, including integration challenges, failure to achieve objectives, the assumption of liabilities, and higher debt levels; legal proceedings and investigatory risks; 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. Except as required by law, the company assumes no obligation to update or revise any forward-looking statements.
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 —
- adjusting for currency (i.e., at constant currency);
- total revenue and cloud revenue adjusting for divested businesses and currency;
- Red Hat revenue normalized for historical comparability;
- presenting operating (non-GAAP) earnings per share amounts and related income statement items;
- adjusting for free cash flow;
- net cash from operating activities, excluding Global Financing receivables.
The rationale for management’s use of these non-GAAP measures is included in Exhibit 99.2 in the Form 8‑K that includes this press release and is being submitted today to the SEC.
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