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IBM Releases First-Quarter 2018 Financial Results; Shares Tumble 5%


IBM (NYSE:IBM) announced first-quarter financial results. Here are the highlights:

  • Revenue of $19.1 billion, up 5 percent (flat adjusting for currency)
  • Gross margin reflects broad-based improvement in year-to-year performance compared to fourth quarter
  • GAAP EPS from continuing operations of $1.81; Operating (non-GAAP) EPS of $2.45, up 4 percent
  • Strategic imperatives revenue of $37.7 billion over last 12 months, up 12 percent (up 10 percent adjusting for currency); represents 47 percent of IBM revenue
  • Cloud revenue of $17.7 billion over last 12 months, up 22 percent (up 20 percent adjusting for currency)
  • As-a-service annual exit run rate for cloud revenue of $10.7 billion in the quarter, up 25 percent year to year (up 20 percent adjusting for currency)
  • Maintains full-year operating (non-GAAP) EPS and free cash flow expectations

Investors reacted to the earnings report with some skittishness, sending IBM’s shares down nearly 5% to $152.22 in after-hours trading Tuesday.

IBM CEO Ginni Rometty commented, “In the first quarter we maintained momentum in our business, with reported revenue growth in total and across our major segments […] These results reinforce that our clients value our innovative technologies, our industry expertise and our commitment and actions for the responsible stewardship of their privacy and data. This is also reflected in our leadership positions in enterprise cloud, AI and security.”

IBM CFO James Kavanaugh added, “The multi-year shift in our investment strategy is paying off as IBM leads in the emerging, high-value segments of the enterprise IT industry […] Revenue, operating net income and free cash flow increased in the quarter, with broad-based improvement in our gross margin trajectory, as we continue to deliver shareholder value.”

Significant Items Impacting Earnings Growth

For the first quarter of 2018, pre-tax income was $1.1 billion and net income from continuing operations was $1.7 billion. Operating (non-GAAP) pre-tax income was $1.7 billion and operating (non-GAAP) net income was $2.3 billion. The year-to-year decrease of 14 percent in operating (non-GAAP) pre-tax income includes a negative impact of 21 points from actions to continue to reposition the business. The year-to-year increase of 2 percent in operating (non-GAAP) net income includes a negative impact of 4 points from these actions and discrete tax benefits.

IBM’s reported GAAP and operating (non-GAAP) tax rates for the first quarter include a $0.8 billion discrete tax benefit. The company’s reported GAAP tax rate also includes an additional provisional charge of $0.1 billion as a result of guidance issued in January 2018 by the Internal Revenue Service related to the enactment of the Tax Cuts and Jobs Act in December 2017. This charge is in addition to the provisional charge of $5.5 billion the company reported in its fourth-quarter 2017 earnings.

For the first quarter, IBM’s ongoing GAAP and operating (non-GAAP) tax rates were approximately 14 percent and approximately 16 percent, respectively.

Strategic Imperatives Revenue

Strategic imperatives revenue over the last 12 months was $37.7 billion, up 12 percent (up 10 percent adjusting for currency). Total cloud revenue over the last 12 months was $17.7 billion, up 22 percent (up 20 percent adjusting for currency). The annual exit run rate for as-a-service revenue increased to $10.7 billion, up 25 percent (up 20 percent adjusting for currency). In the first quarter of 2018, revenues from analytics increased 9 percent (up 4 percent adjusting for currency); revenues from mobile increased 19 percent (up 14 percent adjusting for currency); and revenues from security increased 65 percent (up 60 percent adjusting for currency).

Cash Flow and Balance Sheet

In the first quarter, the company generated net cash from operating activities of $4.6 billion, or $2.2 billion excluding Global Financing receivables. IBM’s free cash flow was $1.3 billion. IBM returned $2.2 billion to shareholders through $1.4 billion in dividends and $0.8 billion in gross share repurchases. At the end of March 2018, IBM had $3.0 billion remaining in the current share repurchase authorization.

IBM ended the first quarter of 2018 with $13.2 billion of cash on hand. Debt totaled $46.4 billion, including Global Financing debt of $31.7 billion. The balance sheet remains strong and is well positioned over the long term.

Segment Results for First Quarter

  • Cognitive Solutions (includes solutions software and transaction processing software) — revenues of $4.3 billion, up 6 percent (up 2 percent adjusting for currency), driven by solutions software, including security, analytics, and industry platforms; and transaction processing software.
  • Global Business Services (includes consulting, global process services and application management) — revenues of $4.2 billion, up 4 percent (down 1 percent adjusting for currency). Strategic imperatives revenue grew 12 percent led by the cloud consulting practice, with double-digit growth in analytics and mobile.
  • Technology Services & Cloud Platforms (includes infrastructure services, technical support services and integration software) — revenues of $8.6 billion, up 5 percent (down 1 percent adjusting for currency). Strategic imperatives revenue grew 24 percent, driven by hybrid cloud services, security and mobile.
  • Systems (includes systems hardware and operating systems software) — revenues of $1.5 billion, up 8 percent (up 4 percent adjusting for currency) driven by growth in IBM Z and Power.
  • Global Financing (includes financing and used equipment sales) — revenues of $405 million, flat year to year (down 4 percent adjusting for currency).

Full-Year 2018 Expectations

The company continues to expect operating (non-GAAP) diluted earnings per share of at least $13.80. The company expects GAAP diluted earnings per share of at least $11.58. Operating (non-GAAP) diluted earnings per share exclude $2.22 per share of charges for amortization of purchased intangible assets, other acquisition-related charges and retirement-related charges as well as ongoing impacts from the enactment of U.S. Tax Reform.

IBM continues to expect free cash flow of approximately $12 billion, with a realization rate greater than 100 percent.

Analyst Ratings

Most on Wall Street anchor a bullish perspective on the software giant, as TipRanks analytics showcase IBM as a Buy. Based on 16 analysts polled in the last 3 months, 6 rate a Buy on IBM stock, 8 maintain a Hold, while 2 issue a Sell on the stock. The 12-month average price target stands at $171, marking a nearly 6% upside from where the stock is currently trading.