IBM Reports 2015 Second-Quarter Results
Second-quarter net income from continuing operations was \\$3.5 billion compared with \\$4.3 billion in the second quarter of 2014, a decrease of 17 percent. Operating (non-GAAP) net income was \\$3.8 billion compared with \\$4.5 billion in the second quarter of 2014, a decrease of 15 percent, significantly impacted by currency, an increase in workforce rebalancing charges, and a year-earlier gain from the divestiture of the customer care outsourcing business.
For the second-quarter of 2015, IBM reported consolidated net income of \\$3.4 billion or \\$3.50 of diluted earnings per share, including operating net losses in discontinued operations related to the Microelectronics business.
Total revenues from continuing operations for the second quarter of 2015 of \\$20.8 billion were down 13 percent (down 1 percent, adjusting for currency and the divested System x business) from the second quarter of 2014.
"Our results for the first half of 2015 demonstrate that we continue to transform our business to higher value and return value to shareholders. We expanded margins, continued to innovate across our portfolio and delivered strong growth in our strategic imperatives of cloud, analytics and engagement, which are becoming a significant part of our business," said Ginni Rometty, IBM chairman, president and chief executive officer.
Second-Quarter GAAP – Operating (non-GAAP) Reconciliation
Second-quarter operating (non-GAAP) diluted earnings exclude \\$0.26 per share of charges: \\$0.14 per share for the amortization of purchased intangible assets and other acquisition-related charges, and \\$0.12 per share for non-operating retirement-related charges driven by changes to plan assets and liabilities primarily related to past market performance.
Full-Year 2015 Expectations
IBM expects full-year 2015 GAAP diluted earnings per share of \\$14.25 to \\$15.00, and operating (non-GAAP) diluted earnings per share of \\$15.75 to \\$16.50. IBM now expects a modest increase in free cash flow, improved from its prior expectation of flat year-to-year performance. The 2015 operating (non-GAAP) earnings expectation excludes \\$1.50 per share of charges for amortization of purchased intangible assets, other acquisition-related charges and retirement-related charges.
Strategic Imperatives
Revenues from the company’s strategic imperatives --- cloud, analytics, and engagement --- increased more than 20 percent year-to-date (more than 30 percent adjusting for currency and the divested System x business). Total cloud revenues increased more than 50 percent (more than 70 percent adjusting for currency and the divested System x business) year-to-date, and is \\$8.7 billion over the last 12 months, adjusted for the divested System x business. The annual run rate for cloud delivered as a service -- a subset of the total cloud revenue -- increased to \\$4.5 billion from \\$2.8 billion in the second quarter of 2014. Revenues from business analytics increased more than 10 percent (more than 20 percent adjusting for currency) year-to-date. Revenues from mobile more than quadrupled, and social revenues increased more than 30 percent (more than 40 percent adjusting for currency), both year-to-date.
Geographic Regions
The Americas’ second-quarter revenues were \\$9.8 billion, a decrease of 8 percent (down 2 percent adjusting for currency and the divested System x business) from the 2014 period. Revenues from Europe/Middle East/Africa were \\$6.6 billion, down 17 percent (up 1 percent adjusting for currency and the divested System x business). Asia-Pacific revenues decreased 19 percent (down 1 percent adjusting for currency and the divested System x business) to \\$4.3 billion. Revenues from the BRIC countries were down 35 percent as reported (down 18 percent adjusting for currency and the divested System x business). The BRIC performance had a negative two-point impact on IBM’s overall revenue growth rate, adjusting for currency and the divested System x business.
Services
Global Technology Services segment revenues were down 10 percent (up 1 percent adjusting for currency and the divested System x business) to \\$8.1 billion. Global Business Services segment revenues were down 12 percent (down 3 percent adjusting for currency) to \\$4.3 billion.
The estimated services backlog as of June 30 was \\$122 billion, up more than 1 percent year-to-year adjusting for currency.
Software
Revenues from the Software segment were down 10 percent to \\$5.8 billion (down 3 percent adjusting for currency) compared with the second quarter of 2014.
Revenues from IBM’s key middleware products, which include WebSphere, Information Management, Tivoli, Workforce Solutions and Rational products, were \\$4.0 billion, down 7 percent (flat adjusting for currency) year-to-year. Operating systems revenues of \\$0.4 billion were down 17 percent (down 9 percent adjusting for currency) year-to-year.
Hardware
Revenues from the Systems Hardware segment totaled \\$2.1 billion for the quarter, down 32 percent (up 5 percent adjusting for currency and the impact of the divested System x business) year-to-year.
Revenues from z Systems mainframe server products increased 9 percent compared with the year-ago period (up 15 percent adjusting for currency). Total delivery of z Systems computing power, as measured in MIPS (millions of instructions per second), increased 24 percent. Revenues from Power Systems were down 1 percent compared with the 2014 period (up 5 percent adjusting for currency). Revenues from System Storage decreased 10 percent (down 4 percent adjusting for currency).
Financing
Global Financing segment revenues decreased 5 percent (up 7 percent, adjusting for currency) in the second quarter at \\$0.5 billion.
Gross Profit
The company’s total gross profit margin from continuing operations was 49.9 percent in the 2015 second quarter compared with 50.1 percent in the 2014 second quarter. Total operating (non-GAAP) gross profit margin from continuing operations was 50.9 percent in the 2015 second quarter compared with 50.7 percent in the 2014 second quarter, with an increase in Hardware and an improving segment mix partially offset by a decline in Services.
Expense
Total expense and other income from continuing operations decreased to \\$6.2 billion, down 8 percent compared to the prior-year period. Year-to-year results include the impact of currency and the divested System x business, partially offset by higher workforce rebalancing charges and the year-earlier gain from the divestiture of the customer care outsourcing business. S,G&A expense of \\$5.2 billion decreased 7 percent year over year. R,D&E expense of \\$1.3 billion decreased 4 percent year-to-year; the related expense-to-revenue ratio increased to 6.2 percent compared with 5.7 percent in the year-ago period. Intellectual property and custom development income decreased to \\$128 million compared with \\$191 million a year ago. Other (income) and expense was income of \\$301 million compared with prior-year income of \\$202 million. Interest expense decreased to \\$115 million compared with \\$136 million in the prior year.
Total operating (non-GAAP) expense and other income from continuing operations decreased to \\$6.0 billion, down 9 percent compared with the prior-year period. Operating (non-GAAP) S,G&A expense of \\$5.0 billion decreased 8 percent compared with prior-year expense. Operating (non-GAAP) R,D&E expense of \\$1.3 billion decreased 7 percent year-to-year, reflecting the impact of currency and the divested System x business; the related expense-to-revenue ratio increased to 6.2 percent compared with 5.7 percent in the year-ago period.
Pre-Tax Income
Pre-tax income from continuing operations decreased 21 percent to \\$4.2 billion. Pre-tax margin from continuing operations decreased 1.9 points to 20.3 percent. Operating (non-GAAP) pre-tax income from continuing operations decreased 18 percent to \\$4.6 billion and pre-tax margin was 22.0 percent, down 1.3 points.
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IBM’s tax rate from continuing operations was 16.5 percent, down 4.0 points year over year; the operating (non-GAAP) tax rate was 17.2 percent, down 3.3 points compared to the year-ago period.
Net income margin from continuing operations decreased 0.7 points to 16.9 percent. Total operating (non-GAAP) net income margin from continuing operations decreased 0.3 points to 18.2 percent.
The weighted-average number of diluted common shares outstanding in the second-quarter 2015 was 987 million compared with 1,005 million shares in the same period of 2014. As of June 30, 2015, there were 980 million basic common shares outstanding.
Debt, including Global Financing, totaled \\$38.7 billion, compared with \\$40.8 billion at year-end 2014. From a management segment view, Global Financing debt totaled \\$26.1 billion versus \\$29.1 billion at year-end 2014. The debt-to-equity ratio is 7.0 to 1. Core (non-global financing) debt totaled \\$12.6 billion, an increase of \\$0.9 billion since year-end 2014 and a decrease of \\$4.5 billion from the second quarter of 2014. IBM ended the second-quarter 2015 with \\$8.8 billion of cash on hand.
The company generated free cash flow of \\$3.4 billion, excluding Global Financing receivables, up \\$0.4 billion year over year. The company returned \\$2.4 billion to shareholders through \\$1.3 billion in dividends and \\$1.1 billion of gross share repurchases. The balance sheet remains strong, and is well positioned to support the business over the long term.
Year-To-Date 2015 Results
Net income from continuing operations for the six months ended June 30, 2015 was \\$5.9 billion compared with \\$6.8 billion in the year-ago period, a decrease of 12 percent. Diluted earnings per share from continuing operations were \\$6.01, down 9 percent compared to the 2014 period.
Consolidated net income was \\$5.8 billion compared to \\$6.5 billion, including operating net losses in discontinued operations related to the Microelectronics business. Consolidated diluted earnings per share were \\$5.84 compared to \\$6.37, down 8 percent year-to-year. Revenues from continuing operations for the six-month period totaled \\$40.4 billion, a decrease of 13 percent (flat year to year, adjusting for currency and divested businesses) compared with \\$46.3 billion for the first six months of 2014.
Operating (non-GAAP) net income from continuing operations for the six months ended June 30, 2015 was \\$6.7 billion compared with \\$7.2 billion in the year-ago period, a decrease of 8 percent. Operating (non-GAAP) diluted earnings per share from continuing operations were \\$6.75 compared with \\$7.08 per diluted share for the 2014 period, a decrease of 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 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 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 --
o presenting operating (non-GAAP) earnings per share amounts and related income statement items;
o adjusting for free cash flow;
o adjusting for currency (i.e., at constant currency);
o adjusting for the divestiture of the System x and the customer care outsourcing businesses.
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/2q15.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).
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