IBM Reports 2016 Fourth-Quarter and Full-Year Results

"In 2016, our strategic imperatives grew to represent more than 40 percent of our total revenue and we have established ourselves as the industry's leading cognitive solutions and cloud platform company," said Ginni Rometty, IBM chairman, president and chief executive officer.  "IBM Watson is the world's leading AI platform for business, and emerging solutions such as IBM Blockchain are enabling new levels of trust in transactions of every kind.  More and more clients are choosing the IBM Cloud because of its differentiated capabilities, which are helping to transform industries, such as financial services, airlines and retail."

"In 2016, we again made substantial capital investments, increased our R&D spending and acquired 15 companies -- a total of more than \\$15 billion across these elements.  The acquisitions further strengthened our capabilities in analytics, security, cognitive and cloud, while expanding our level of industry expertise with additions such as Truven Health Analytics and Promontory Financial Group,” said Martin Schroeter, IBM senior vice president and chief financial officer.  "At the same time, we returned almost \\$9 billion to shareholders through dividends and gross share repurchases."

Strategic Imperatives

Fourth-quarter cloud revenues increased 33 percent.  The annual exit run rate for cloud as-a-service revenue increased to \\$8.6 billion from \\$5.3 billion at year-end 2015.  Revenues from analytics increased 9 percent.  Revenues from mobile increased 16 percent (up 17 percent adjusting for currency) and revenues from security increased 7 percent (up 8 percent adjusting for currency).

For the full year, revenues from strategic imperatives increased 13 percent (up 14 percent adjusting for currency).  Cloud revenues increased 35 percent to \\$13.7 billion.  The annual exit run rate for cloud as-a-service revenue increased 61 percent (up 63 percent adjusting for currency) year to year.  Revenues from analytics increased 9 percent.  Revenues from mobile increased 34 percent (up 35 percent adjusting for currency) and from security increased 13 percent (up 14 percent adjusting for currency).

Full-Year 2017 Expectations

The company expects operating (non-GAAP) diluted earnings per share of at least \\$13.80 and GAAP diluted earnings per share of at least \\$11.95.  Operating (non-GAAP) diluted earnings per share exclude \\$1.85 per share of charges for amortization of purchased intangible assets, other acquisition-related charges and retirement-related charges.  IBM expects a free cash flow realization rate in excess of 90 percent of GAAP net income.

Cash Flow and Balance Sheet

In the fourth quarter, the company generated net cash from operating activities of \\$3.2 billion; or \\$5.6 billion excluding Global Financing receivables.  IBM’s free cash flow was \\$4.7 billion.  IBM returned \\$1.3 billion in dividends and \\$0.9 billion of gross share repurchases to shareholders.  At the end of December 2016, IBM had \\$5.1 billion remaining in the current share repurchase authorization.

The company generated full-year free cash flow of \\$11.6 billion, excluding Global Financing receivables.  The company returned \\$8.8 billion to shareholders through \\$5.3 billion in dividends and \\$3.5 billion of gross share repurchases.

IBM ended the fourth-quarter 2016 with \\$8.5 billion of cash on hand.  Debt, including Global Financing debt of \\$27.9 billion, totaled \\$42.2 billion.  Core (non-Global Financing) debt totaled \\$14.3 billion.  The balance sheet remains strong and is well positioned to support the business over the long term.

Segment Results for Fourth Quarter

• Cognitive Solutions (includes solutions software and transaction processing software) -- revenues of \\$5.3 billion, up 1.4 percent (up 2.2 percent adjusting for currency) were driven by growth in cloud, analytics and security.
• Global Business Services (includes consulting, global process services and application management) -- revenues of \\$4.1 billion, down 4.1 percent (down 3.6 percent adjusting for currency).  
• Technology Services & Cloud Platforms (includes infrastructure services, technical support services and integration software) -- revenues of \\$9.3 billion, up 1.7 percent (up 2.4 percent adjusting for currency).  Growth was driven by strong hybrid cloud services, analytics and security performance.
• Systems (includes systems hardware and operating systems software) -- revenues of \\$2.5 billion, down 12.5 percent (down 12.1 percent adjusting for currency).  Gross profit margins improved driven by z Systems performance.
• Global Financing (includes financing and used equipment sales) -- revenues of \\$447 million, down 1.5 percent (down 2.1 percent adjusting for currency).

Full-Year 2016 Results

Diluted earnings per share from continuing operations were \\$12.39, down 9 percent compared to the 2015 period.  Net income from continuing operations for the twelve months ended December 31, 2016 was \\$11.9 billion compared with \\$13.4 billion in the year-ago period, a decrease of 11 percent.

Consolidated net income was \\$11.9 billion compared to \\$13.2 billion in the year-ago period.  Consolidated diluted earnings per share were \\$12.38 compared to \\$13.42, down 8 percent year to year. Revenues from continuing operations for the twelve-month period totaled \\$79.9 billion, a decrease of 2 percent year to year compared with \\$81.7 billion for the twelve months of 2015.

Operating (non-GAAP) diluted earnings per share from continuing operations were \\$13.59 compared with \\$14.92 per diluted share for the 2015 period, a decrease of 9 percent.  Operating (non-GAAP) net income from continuing operations for the twelve months ended December 31, 2016 was \\$13.0 billion compared with \\$14.7 billion in the year-ago period, a decrease of 11 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 data 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; 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; 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 --

• presenting operating (non-GAAP) earnings per share amounts and related income statement items;  
• adjusting for free cash flow;
• adjusting for currency (i.e., at constant currency).

Free cash flow guidance is derived using an estimate of profit, working capital and operational cash outflows.  The company views Global Financing receivables as a profit-generating investment, which it seeks to maximize and therefore it is not considered when formulating guidance for free cash flow.  As a result, the company does not estimate a GAAP Net Cash from Operations expectation metric.

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.