Intnl Bus. Mach UK Regulatory Announcement: IBM Reports 2021 Third-Quarter Results

Revenue Performance Led by Consulting and Software; Solid Cash Generation

Highlights

Third Quarter:

• Revenue of $17.6 billion, up 0.3 percent (down 0.2 percent adjusting for divested businesses and currency)
  
  – Cloud & Cognitive Software up 3 percent (up 2 percent adjusting for currency)
  
  – Global Business Services up 12 percent (up 11 percent adjusting for currency)
• Revenue, up 2.5 percent (up 1.9 percent adjusting for divested businesses and currency), normalized to exclude Kyndryl to be separated in November
• Net cash from operating activities of $16.1 billion and adjusted free cash flow of $11.1 billion, both up $0.3 billion over last 12 months
• Total cloud revenue over last 12 months of $27.8 billion, up 14 percent (up 11 percent adjusting for divested businesses and currency)
  
  – Cloud & Cognitive Software cloud revenue up 31 percent (up 28 percent adjusting for currency)
  
  – Global Business Services cloud revenue up 30 percent (up 27 percent adjusting for currency)
• Red Hat revenue up 17 percent, normalized for historical comparability
• Debt reduced by $7.0 billion since year-end 2020

ARMONK, N.Y.–(BUSINESS WIRE)– 

IBM (NYSE: IBM) today announced third-quarter 2021 earnings results.

“With the separation of Kyndryl early next month, IBM takes the next step in our evolution as a platform-centric hybrid cloud and AI company,” said Arvind Krishna, IBM chairman and chief executive officer. “We continue to make progress in our software and consulting businesses, which represent our higher growth opportunities. With our increased focus and agility to better serve clients, we are confident in achieving our medium-term objectives of mid-single digit revenue growth and strong free cash flow generation.”

		THIRD QUARTER 2021
		All GAAP results include the impact of Kyndryl separation costs*
											Pre-tax		Gross
			Diluted			Net			Pre-tax		Income		Profit
			EPS			Income			Income		Margin		Margin
GAAP from Continuing Operations		$	1.25		$	1.1B		$	1.3B		7.5	%	46.4	%
Year/Year			(34	)%		(33	)%		(28	)%	(2.9	)Pts	(1.6	)Pts
Operating (Non-GAAP)		$	2.52		$	2.3B		$	2.4B		13.6	%	48.0	%
Year/Year			(2	)%		(1	)%		(7	)%	(1.0	)Pts	(1.0	)Pts
GAAP EPS results include impacts related to the amortization of purchased intangible assets and other acquisition-related charges, retirement-related charges, U.S. tax reform enactment impacts, and transaction costs associated with the Kyndryl separation. * Impact of Kyndryl separation costs for third quarter 2021 GAAP results: EPS ($0.56) per share; Net Income ($0.5B); Pre-tax Income ($0.3B); Pre-Tax Income Margin (1.6) points; Gross Profit Margin (0.6) points

“We again had solid cash generation for the quarter and over the last year, while maintaining a strong balance sheet and the liquidity to support our hybrid cloud and AI strategy,” said James Kavanaugh, IBM senior vice president and chief financial officer. “Our post-separation portfolio mix is shifted toward our growth vectors, with a higher-value recurring revenue stream and strong cash generation, allowing us to continue to invest in the business and provide attractive shareholder returns.”

Cash Flow and Balance Sheet

In the third quarter, the company generated net cash from operating activities of $2.7 billion. IBM’s free cash flow was $0.6 billion, which includes $0.6 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 Kyndryl. IBM’s adjusted free cash flow, excluding these cash impacts, was $1.2 billion. The company returned $1.5 billion to shareholders in dividends.

Over the last 12 months, the company generated net cash from operating activities of $16.1 billion. IBM’s free cash flow for the last 12 months was $9.2 billion. The company’s adjusted free cash flow, excluding cash impacts of $1.8 billion for the structural actions and transaction separation costs, was $11.1 billion.

IBM ended the third quarter with $8.4 billion of cash on hand (includes marketable securities), down $5.9 billion from year-end 2020 reflecting acquisitions of $3.0 billion and debt reduction payments. Debt, including Global Financing debt of $15.9 billion, totaled $54.5 billion, down $7.0 billion since the end of 2020, and down $18.5 billion since closing the Red Hat acquisition.

Segment Results for Third Quarter

• Cloud & Cognitive Software (includes Cloud & Data Platforms, Cognitive Applications and Transaction Processing Platforms) —revenues of $5.7 billion, up 2.5 percent (up 1.9 percent adjusting for currency). Cloud & Data Platforms grew 10 percent (up 9 percent adjusting for currency), Cognitive Applications revenue was flat (down 1 percent adjusting for currency) and Transaction Processing Platforms declined 9 percent. Cloud revenue up 21 percent (up 20 percent adjusting for currency).
• Global Business Services (includes Consulting, Application Management and Global Process Services) — revenues of $4.4 billion, up 11.6 percent (up 11.0 percent adjusting for currency), with growth in Consulting, up 17 percent (up 16 percent adjusting for currency), Application Management up 5 percent, and Global Process Services up 19 percent. Cloud revenue up 38 percent (up 37 percent adjusting for currency).
• Global Technology Services (includes Infrastructure & Cloud Services and Technology Support Services) — revenues of $6.2 billion, down 4.8 percent (down 5.4 percent adjusting for currency). Infrastructure & Cloud Services declined 5 percent (down 6 percent adjusting for currency) and Technology Support Services declined 4 percent (down 5 percent adjusting for currency). Cloud revenue up 1 percent (flat adjusting for currency). Gross profit margin up 120 basis points.
• Systems (includes Systems Hardware and Operating Systems Software) — revenues of $1.1 billion, down 11.9 percent (down 12.4 percent adjusting for currency), driven by declines in IBM Z (down 33 percent) and Power systems down 24 percent (down 25 percent adjusting for currency). Storage Systems grew 11 percent. Cloud revenue down 42 percent (down 43 percent adjusting for currency).
• Global Financing (includes financing and used equipment sales) — revenues of $220 million, down 19.2 percent (down 19.8 percent adjusting for currency).

Year-To-Date 2021 Results

Revenues for the nine-month period ended September 30, 2021 totaled $54.1 billion, an increase of 1.6 percent year to year (down 1 percent adjusting for divested businesses and currency) compared with $53.3 billion for the first nine months of 2020. Net income was $3.4 billion, down 19 percent year to year, reflecting the impact of $0.7 billion of transaction costs associated with the Kyndryl separation. Diluted earnings per share was $3.77 compared with $4.72 per diluted share for the 2020 period, a decrease of 20 percent.

GAAP earnings per share results include a ($2.85) per-share impact for charges related to amortization of purchased intangible assets and other acquisition-related charges, retirement-related charges, U.S. tax reform enactment impacts, and transaction costs associated with the Kyndryl separation. The impact of the Kyndryl separation costs was ($0.76) per share.

Operating (non-GAAP) net income for the nine months ended September 30, 2021 was $6.0 billion compared with $5.9 billion in the prior-year period, an increase of 1.3 percent. Operating (non-GAAP) diluted earnings per share from continuing operations was $6.62 compared with $6.60 per diluted share for the 2020 period, flat year to year.

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; 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; 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; 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; fluctuations in financial results; impact of local legal, economic, political, health and other conditions; the company’s failure to meet growth and productivity objectives; 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; reliance on third party distribution channels and ecosystems; cybersecurity and data privacy considerations; adverse effects from environmental matters, tax matters; legal proceedings and investigatory risks; the company’s pension plans; currency fluctuations and customer financing risks; impact of changes in market liquidity conditions and customer credit risk on receivables; 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 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.

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 —

• adjusting for currency (i.e., at constant currency);
• total revenue and cloud revenue adjusting for divested businesses and currency;
• total revenue normalized to exclude Kyndryl to be separated in November;
• Red Hat revenue normalized for historical comparability;
• presenting operating (non-GAAP) earnings per share amounts and related income statement items;
• free cash flow;
• adjusted free cash flow.

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.

Conference Call and Webcast

IBM’s regular quarterly earnings conference call is scheduled to begin at 5:00 p.m. EDT, today. The Webcast may be accessed via a link at https://www.ibm.com/investor/events/earnings-3q21. 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).

INTERNATIONAL BUSINESS MACHINES CORPORATION COMPARATIVE FINANCIAL RESULTS (Unaudited; Dollars in millions except per share amounts)
		Three Months Ended									Nine Months Ended
		September 30,									September 30,
		2021				2020					2021				2020
REVENUE
Cloud & Cognitive Software		$	5,692			$	5,553				$	17,227			$	16,540
Global Business Services			4,427				3,965					13,002				11,992
Global Technology Services			6,154				6,462					18,866				19,245
Systems			1,107				1,257					4,251				4,477
Global Financing			220				273					702				837
Other			18				50					45				163
TOTAL REVENUE			17,618				17,560					54,093				53,253
GROSS PROFIT			8,171				8,430					25,379				25,052
GROSS PROFIT MARGIN
Cloud & Cognitive Software			77.0		%		77.1		%			77.1		%		76.6		%
Global Business Services			29.8		%		32.9		%			28.6		%		29.5		%
Global Technology Services			36.2		%		35.0		%			35.3		%		34.4		%
Systems			41.3		%		51.2		%			51.3		%		53.7		%
Global Financing			25.6		%		37.5		%			28.4		%		39.0		%
TOTAL GROSS PROFIT MARGIN			46.4		%		48.0		%			46.9		%		47.0		%
EXPENSE AND OTHER INCOME
S,G&A			4,860				4,647					15,368				15,849
R,D&E			1,621				1,515					4,907				4,722
Intellectual property and custom development income			(153	)			(134	)				(435	)			(453	)
Other (income) and expense			234				253					911				614
Interest expense			291				323					852				971
TOTAL EXPENSE AND OTHER INCOME			6,852				6,603					21,603				21,704
INCOME/(LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES			1,319				1,827					3,776				3,348
Pre-tax margin			7.5		%		10.4		%			7.0		%		6.3		%
Provision for/(Benefit from) income taxes			188				128					365				(888	)
Effective tax rate			14.3		%		7.0		%			9.7		%		(26.5	)	%
INCOME FROM CONTINUING OPERATIONS		$	1,130			$	1,698				$	3,411			$	4,237
DISCONTINUED OPERATIONS
Income/(Loss) from discontinued operations, net of taxes			—				(1	)				(1	)			(2	)
NET INCOME		$	1,130			$	1,698				$	3,410			$	4,234
EARNINGS/(LOSS) PER SHARE OF COMMON STOCK
Assuming Dilution
Continuing Operations		$	1.25			$	1.89				$	3.77			$	4.72
Discontinued Operations		$	0.00			$	0.00				$	0.00			$	0.00
TOTAL		$	1.25			$	1.89				$	3.77			$	4.72
Basic
Continuing Operations		$	1.26			$	1.90				$	3.81			$	4.76
Discontinued Operations		$	0.00			$	0.00				$	0.00			$	0.00
TOTAL		$	1.26			$	1.90				$	3.81			$	4.76
WEIGHTED-AVERAGE NUMBER OF COMMON SHARES OUTSTANDING (M’s)
Assuming Dilution			906.0				897.3					904.0				895.8
Basic			897.1				891.4					895.3				889.6

INTERNATIONAL BUSINESS MACHINES CORPORATION CONDENSED CONSOLIDATED BALANCE SHEET (Unaudited)
		At				At
		September 30,				December 31,
(Dollars in Millions)		2021				2020
ASSETS:
Current Assets:
Cash and cash equivalents		$	7,455			$	13,212
Restricted cash			352				463
Marketable securities			600				600
Notes and accounts receivable – trade, net			6,609				7,132
Short-term financing receivables, net			7,161				10,892
Other accounts receivable, net			899				714
Inventories			1,891				1,839
Deferred costs			2,046				2,107
Prepaid expenses and other current assets			2,954				2,206
Total Current Assets			29,967				39,165
Property, plant and equipment, net			9,138				10,040
Operating right-of-use assets, net			4,253				4,686
Long-term financing receivables, net			5,046				7,086
Prepaid pension assets			8,197				7,610
Deferred costs			2,248				2,449
Deferred taxes			8,967				9,241
Goodwill			61,378				59,617
Intangibles, net			13,025				13,796
Investments and sundry assets			1,996				2,282
Total Assets		$	144,214			$	155,971
LIABILITIES:
Current Liabilities:
Taxes		$	2,159			$	3,301
Short-term debt			7,575				7,183
Accounts payable			4,248				4,908
Deferred income			12,264				12,833
Operating lease liabilities			1,285				1,357
Other liabilities			8,300				10,287
Total Current Liabilities			35,832				39,869
Long-term debt			46,926				54,355
Retirement related obligations			16,764				18,248
Deferred income			3,965				4,301
Operating lease liabilities			3,192				3,574
Other liabilities			15,179				14,897
Total Liabilities			121,858				135,244
EQUITY:
IBM Stockholders’ Equity:
Common stock			57,189				56,556
Retained earnings			161,747				162,717
Treasury stock — at cost			(169,406	)			(169,339	)
Accumulated other comprehensive income/(loss)			(27,302	)			(29,337	)
Total IBM Stockholders’ Equity			22,228				20,597
Noncontrolling interests			129				129
Total Equity			22,357				20,727
Total Liabilities and Equity		$	144,214			$	155,971

INTERNATIONAL BUSINESS MACHINES CORPORATION CASH FLOW ANALYSIS (Unaudited)
																		Trailing Twelve
		Three Months Ended								Nine Months Ended								Months Ended
		September 30,								September 30,								September 30,
(Dollars in Millions)		2021				2020				2021				2020				2021
Net Cash Provided by Operating Activities per GAAP:		$	2,713			$	4,286			$	10,252			$	12,337			$	16,111
Less: Change in Global Financing (GF) Receivables			1,472				2,353				5,235				5,324				4,260
Capital Expenditures, net			(638	)			(829	)			(1,855	)			(2,262	)			(2,635	)
Free Cash Flow			603				1,104				3,162				4,751				9,216
Structural actions initiated in 4Q20 & Separation charges (1)			566				—				1,792				—				1,841
Adjusted Free Cash Flow			1,170				1,104				4,954				4,751				11,057
Free Cash Flow			603				1,104				3,162				4,751				9,216
Acquisitions			(152	)			(17	)			(3,018	)			(37	)			(3,317	)
Divestitures			51				(248	)			26				510				19
Dividends			(1,471	)			(1,453	)			(4,395	)			(4,343	)			(5,850	)
Non-GF Debt			1,187				1,019				(1,143	)			4,977				(5,899	)
Other (includes GF Net Receivables and GF Debt)			22				1,098				(500	)			886				(1,516	)
Change in Cash, Cash Equivalents, Restricted Cash and Short-term Marketable Securities		$	241			$	1,503			$	(5,868	)		$	6,744			$	(7,347	)

_______________
(1)	Includes cash impacts incurred in the period related to structural actions initiated in 4Q20 and separation related costs.

INTERNATIONAL BUSINESS MACHINES CORPORATION CASH FLOW (Unaudited)
		Three Months Ended								Nine Months Ended
		September 30,								September 30,
(Dollars in Millions)		2021				2020				2021				2020
Net Income from Operations		$	1,130			$	1,698			$	3,410			$	4,234
Depreciation/Amortization of Intangibles			1,684				1,683				5,036				4,996
Stock-based Compensation			262				222				719				658
Working Capital / Other			(1,834	)			(1,670	)			(4,147	)			(2,874	)
Global Financing A/R			1,472				2,353				5,235				5,324
Net Cash Provided by Operating Activities		$	2,713			$	4,286			$	10,252			$	12,337
Capital Expenditures, net of payments & proceeds			(638	)			(829	)			(1,855	)			(2,262	)
Divestitures, net of cash transferred			51				(248	)			26				510
Acquisitions, net of cash acquired			(152	)			(17	)			(3,018	)			(37	)
Marketable Securities / Other Investments, net			109				762				(453	)			(680	)
Net Cash Provided by/(Used in) Investing Activities		$	(629	)		$	(332	)		$	(5,300	)		$	(2,470	)
Debt, net of payments & proceeds			(287	)			(252	)			(6,086	)			1,067
Dividends			(1,471	)			(1,453	)			(4,395	)			(4,343	)
Common Stock Transactions – Other			9				16				(181	)			(152	)
Net Cash Provided by/(Used in) Financing Activities		$	(1,748	)		$	(1,689	)		$	(10,662	)		$	(3,428	)
Effect of Exchange Rate changes on Cash			(94	)			101				(159	)			(200	)
Net Change in Cash, Cash Equivalents and Restricted Cash		$	241			$	2,366			$	(5,868	)		$	6,239

INTERNATIONAL BUSINESS MACHINES CORPORATION SEGMENT DATA (Unaudited)
		Three Months Ended September 30, 2021
		Cloud &			Global			Global
		Cognitive			Business			Technology								Global
(Dollars in Millions)		Software			Services			Services				Systems				Financing
Revenue
External		$	5,692		$	4,427		$	6,154			$	1,107			$	220
Internal			764			53			317				176				153
Total Segment Revenue		$	6,456		$	4,480		$	6,471			$	1,283			$	373
Pre-tax Income/(Loss) from Continuing Operations			1,675			587			383				(207	)			206
Pre-tax Margin			25.9	%		13.1	%		5.9		%		(16.1	)	%		55.1		%
Change YTY Revenue – External			2.5	%		11.6	%		(4.8	)	%		(11.9	)	%		(19.2	)	%
Change YTY Revenue – External @constant currency			1.9	%		11.0	%		(5.4	)	%		(12.4	)	%		(19.8	)	%

		Three Months Ended September 30, 2020
		Cloud &			Global			Global
		Cognitive			Business			Technology							Global
(Dollars in Millions)		Software			Services			Services			Systems				Financing
Revenue
External		$	5,553		$	3,965		$	6,462		$	1,257			$	273
Internal			875			49			312			240				208
Total Segment Revenue		$	6,428		$	4,014		$	6,774		$	1,497			$	480
Pre-tax Income/(Loss) from Continuing Operations			1,834			570			399			(37	)			196
Pre-tax Margin			28.5	%		14.2	%		5.9	%		(2.5	)	%		40.7	%

INTERNATIONAL BUSINESS MACHINES CORPORATION SEGMENT DATA (Unaudited)
		Nine Months Ended September 30, 2021
		Cloud &			Global			Global
		Cognitive			Business			Technology								Global
(Dollars in Millions)		Software			Services			Services				Systems				Financing
Revenue
External		$	17,227		$	13,002		$	18,866			$	4,251			$	702
Internal			2,322			166			956				606				581
Total Segment Revenue		$	19,549		$	13,168		$	19,822			$	4,857			$	1,283
Pre-tax Income/(Loss) from Continuing Operations			4,822			1,349			903				(33	)			618
Pre-tax Margin			24.7	%		10.2	%		4.6		%		(0.7	)	%		48.1		%
Change YTY Revenue – External			4.2	%		8.4	%		(2.0	)	%		(5.1	)	%		(16.2	)	%
Change YTY Revenue – External @constant currency			1.7	%		5.5	%		(4.9	)	%		(7.0	)	%		(18.0	)	%

		Nine Months Ended September 30, 2020
		Cloud &			Global			Global
		Cognitive			Business			Technology							Global
(Dollars in Millions)		Software			Services			Services			Systems				Financing
Revenue
External		$	16,540		$	11,992		$	19,245		$	4,477			$	837
Internal			2,431			150			911			628				660
Total Segment Revenue		$	18,971		$	12,142		$	20,155		$	5,106			$	1,497
Pre-tax Income/(Loss) from Continuing Operations			4,475			1,203			471			(7	)			566
Pre-tax Margin			23.6	%		9.9	%		2.3	%		(0.1	)	%		37.8	%

INTERNATIONAL BUSINESS MACHINES CORPORATION U.S. GAAP TO OPERATING (Non-GAAP) RESULTS RECONCILIATION (Unaudited; Dollars in millions except per share amounts)
		Three Months Ended September 30, 2021
		Continuing Operations
					Acquisition-			Retirement-			Tax			Separation-
					Related			Related			Reform			Related			Operating
		GAAP			Adjustments (1)			Adjustments (2)			Impacts			Charges (4)			(Non-GAAP)
Gross Profit		$	8,171		$	184		$	—		$	—		$	108		$	8,463
Gross Profit Margin			46.4	%		1.0	Pts		—	Pts		—	Pts		0.6	Pts		48.0	%
S,G&A			4,860			(293)			—			—			(169)			4,398
R,D&E			1,621			—			—			—			(1)			1,620
Other (Income) & Expense			234			(1)			(328)			—			—			(94)
Interest Expense			291			—			—			—			—			291
Total Expense & Other (Income)			6,852			(294)			(328)			—			(169)			6,061
Pre-tax Income from Continuing Operations			1,319			478			328			—			277			2,402
Pre-tax Income Margin from Continuing Operations			7.5	%		2.7	Pts		1.9	Pts		—	Pts		1.6	Pts		13.6	%
Provision for/(Benefit from) Income Taxes (3)			188			103			57			—			(233)			115
Effective Tax Rate			14.3	%		1.5	Pts		0.4	Pts		—	Pts		(11.4)	Pts		4.8	%
Income from Continuing Operations			1,130			375			271			—			510			2,286
Income Margin from Continuing Operations			6.4	%		2.1	Pts		1.5	Pts		—	Pts		2.9	Pts		13.0	%
Diluted Earnings/(Loss) Per Share: Continuing Operations		$	1.25		$	0.41		$	0.30		$	—		$	0.56		$	2.52

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