IBM Reports 2020 Third-Quarter Results

Strong Cloud Revenue Growth; Gross Margin Expansion; Solid Balance Sheet and Liquidity Position

ARMONK, N.Y.–(BUSINESS WIRE)–$ibm #ibm–IBM (NYSE: 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	%	2.0	Pts	1.8	Pts
Operating (Non-GAAP)		$	2.58		$	2.3B		$	2.6B		14.7	%	49.0	%
Year/Year			(4)	%		(3)	%		8	%	1.4	Pts	1.6	Pts

“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.

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;
• 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.

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-3q20. 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,
		2020			2019					2020			2019
REVENUE
Cloud & Cognitive Software		$	5,553		$	5,201	*			$	16,540		$	15,731	*
Global Business Services			3,965			4,160	*				11,992			12,513	*
Global Technology Services			6,462			6,700					19,245			20,412
Systems			1,257			1,481					4,477			4,562
Global Financing			273			343					837			1,100
Other			50			142	*				163			1,053	*
TOTAL REVENUE			17,560			18,028					53,253			55,370
GROSS PROFIT			8,430			8,336					25,052			25,388
GROSS PROFIT MARGIN
Cloud & Cognitive Software			77.1	%		74.5	%	*			76.6	%		76.0	%	*
Global Business Services			32.9	%		31.1	%	*			29.5	%		27.8	%	*
Global Technology Services			35.0	%		35.8	%				34.4	%		34.6	%
Systems			51.2	%		52.6	%				53.7	%		51.1	%
Global Financing			37.5	%		36.9	%				39.0	%		35.6	%
TOTAL GROSS PROFIT MARGIN			48.0	%		46.2	%				47.0	%		45.9	%
EXPENSE AND OTHER INCOME
S,G&A			4,647			5,024					15,849			15,171
R,D&E			1,515			1,553					4,722			4,393
Intellectual property and custom development income			(134)			(166)					(453)			(489)
Other (income) and expense			253			(31)					614			(850)
Interest expense			323			432					971			990
TOTAL EXPENSE AND OTHER INCOME			6,603			6,813					21,704			19,215
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES			1,827			1,522					3,348			6,173
Pre-tax margin			10.4	%		8.4	%				6.3	%		11.1	%
Provision for / (Benefit from) income taxes			128			(151)					(888)			407
Effective tax rate			7.0	%		(9.9)	%				(26.5)	%		6.6	%
INCOME FROM CONTINUING OPERATIONS		$	1,698		$	1,673				$	4,237		$	5,766
DISCONTINUED OPERATIONS
Income / (Loss) from discontinued operations, net of taxes			(1)			(1)					(2)			(5)
NET INCOME		$	1,698		$	1,672				$	4,234		$	5,761
EARNINGS / (LOSS) PER SHARE OF COMMON STOCK
Assuming Dilution
Continuing Operations		$	1.89		$	1.87				$	4.72		$	6.46
Discontinued Operations		$	0.00		$	0.00				$	0.00		$	(0.01)
TOTAL		$	1.89		$	1.87				$	4.72		$	6.45
Basic
Continuing Operations		$	1.90		$	1.89				$	4.76		$	6.50
Discontinued Operations		$	0.00		$	0.00				$	0.00		$	(0.01)
TOTAL		$	1.90		$	1.89				$	4.76		$	6.49
WEIGHTED-AVERAGE NUMBER OF COMMON SHARES OUTSTANDING (M’s)
Assuming Dilution			897.3			892.8					895.8			892.5
Basic			891.4			886.0					889.6			887.3

_____________________________

* Recast to conform with 2020 presentation.

INTERNATIONAL BUSINESS MACHINES CORPORATION CONDENSED CONSOLIDATED BALANCE SHEET (Unaudited)
		At			At
		September 30,			December 31,
(Dollars in Millions)		2020			2019
ASSETS:
Current Assets:
Cash and cash equivalents		$	14,393		$	8,172
Restricted cash			160			141
Marketable securities			1,200			696
Notes and accounts receivable – trade, net			6,099			7,870
Short-term financing receivables, net			10,848			14,192
Other accounts receivable, net			923			1,733
Inventories			1,949			1,619
Deferred costs			2,084			1,896
Prepaid expenses and other current assets			2,188			2,101
Total Current Assets			39,845			38,420
Property, plant and equipment, net			9,958			10,010
Operating right-of-use assets, net			4,715			4,996
Long-term financing receivables, net			6,423			8,712
Prepaid pension assets			7,636			6,865
Deferred costs			2,438			2,472
Deferred taxes			8,852			5,182
Goodwill			58,355			58,222
Intangibles, net			13,962			15,235
Investments and sundry assets			1,944			2,074
Total Assets		$	154,128		$	152,186
LIABILITIES:
Current Liabilities:
Taxes		$	2,375		$	2,839
Short-term debt			10,285			8,797
Accounts payable			3,985			4,896
Deferred income			11,681			12,026
Operating lease liabilities			1,336			1,380
Other liabilities			8,332			7,763
Total Current Liabilities			37,993			37,701
Long-term debt			55,129			54,102
Retirement related obligations			16,732			17,142
Deferred income			3,820			3,851
Operating lease liabilities			3,635			3,879
Other liabilities			15,484			14,526
Total Liabilities			132,794			131,202
EQUITY:
IBM Stockholders’ Equity:
Common stock			56,366			55,895
Retained earnings			162,806			162,954
Treasury stock — at cost			(169,380)			(169,413)
Accumulated other comprehensive income/(loss)			(28,584)			(28,597)
Total IBM Stockholders’ Equity			21,208			20,841
Noncontrolling interests			126			144
Total Equity			21,334			20,985
Total Liabilities and Equity		$	154,128		$	152,186

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)		2020			2019			2020			2019			2020
Net Cash Provided by Operating Activities per GAAP:		$	4,286		$	3,619		$	12,337		$	11,319		$	15,789
Less: change in Global Financing (GF) Receivables			2,353			1,135			5,324			3,712			2,104
Capital Expenditures, Net			(829)			(681)			(2,262)			(1,725)			(2,907)
Free Cash Flow			1,104			1,803			4,751			5,882			10,778
Acquisitions			(17)			(32,587)			(37)			(32,630)			(37)
Divestitures			(248)			39			510			927			658
Dividends			(1,453)			(1,436)			(4,343)			(4,269)			(5,780)
Share Repurchase			—			(126)			—			(1,361)			—
Non-GF Debt			1,019			(4,967)			4,977			28,432			(663)
Other (includes GF Net Receivables and GF Debt)			1,098			1,823			886			1,755			(160)
Change in Cash, Cash Equivalents, Restricted Cash and Short-term Marketable Securities		$	1,503		$	(35,451)		$	6,744		$	(1,265)		$	4,796

INTERNATIONAL BUSINESS MACHINES CORPORATION CASH FLOW (Unaudited)
		Three Months Ended						Nine Months Ended
		September 30,						September 30,
(Dollars in Millions)		2020			2019			2020			2019
Net Income from Operations		$	1,698		$	1,672		$	4,234		$	5,761
Depreciation/Amortization of Intangibles			1,683			1,669			4,996			4,409
Stock-based Compensation			222			220			658			468
Working Capital / Other			(1,670)			(1,077)			(2,874)			(3,031)
Global Financing A/R			2,353			1,135			5,324			3,712
Net Cash Provided by Operating Activities		$	4,286		$	3,619		$	12,337		$	11,319
Capital Expenditures, net of payments & proceeds			(829)			(681)			(2,262)			(1,725)
Divestitures, net of cash transferred			(248)			39			510			927
Acquisitions, net of cash acquired			(17)			(32,587)			(37)			(32,630)
Marketable Securities / Other Investments, net			762			2,856			(680)			6,365
Net Cash Provided by / (Used in) Investing Activities		$	(332)		$	(30,373)		$	(2,470)		$	(27,064)
Debt, net of payments & proceeds			(252)			(6,608)			1,067			20,465
Dividends			(1,453)			(1,436)			(4,343)			(4,269)
Common Stock Repurchases			—			(126)			—			(1,361)
Common Stock Transactions – Other			16			(7)			(152)			(118)
Net Cash Provided by / (Used in) Financing Activities		$	(1,689)		$	(8,177)		$	(3,428)		$	14,717
Effect of Exchange Rate changes on Cash			101			(378)			(200)			(352)
Net Change in Cash, Cash Equivalents and Restricted Cash		$	2,366		$	(35,310)		$	6,239		$	(1,379)

INTERNATIONAL BUSINESS MACHINES CORPORATION SEGMENT DATA (Unaudited)
		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	%
Change YTY Revenue – External			6.8	%		(4.7)	%		(3.6)	%		(15.1)	%		(20.5)	%
Change YTY Revenue – External @constant currency			5.8	%		(5.8)	%		(4.3)	%		(16.0)	%		(20.3)	%

		Three Months Ended September 30, 2019
		Cloud &			Global			Global
		Cognitive			Business			Technology						Global
(Dollars in Millions)		Software*			Services*			Services			Systems			Financing
Revenue
External		$	5,201		$	4,160		$	6,700		$	1,481		$	343
Internal			686			70			287			195			302
Total Segment Revenue		$	5,888		$	4,230		$	6,988		$	1,676		$	645
Pre-tax Income / (Loss) from Continuing Operations			1,290			567			490			39			275
Pre-tax Margin			21.9	%		13.4	%		7.0	%		2.3	%		42.6	%

_____________________________

* Recast to conform with 2020 presentation.

INTERNATIONAL BUSINESS MACHINES CORPORATION SEGMENT DATA (Unaudited)
		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	%
Change YTY Revenue – External			5.1	%		(4.2)	%		(5.7)	%		(1.9)	%		(23.9)	%
Change YTY Revenue – External @constant currency			5.7	%		(3.7)	%		(4.6)	%		(1.6)	%		(22.8)	%

		Nine Months Ended September 30, 2019
		Cloud &			Global			Global
		Cognitive			Business			Technology						Global
(Dollars in Millions)		Software*			Services*			Services			Systems			Financing
Revenue
External		$	15,731		$	12,513		$	20,412		$	4,562		$	1,100
Internal			2,135			213			879			528			884
Total Segment Revenue		$	17,865		$	12,726		$	21,291		$	5,091		$	1,983
Pre-tax Income / (Loss) from Continuing Operations			5,082			1,154			1,000			(101)			803
Pre-tax Margin			28.4	%		9.1	%		4.7	%		(2.0)	%		40.5	%

_____________________________

* Recast to conform with 2020 presentation.

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, 2020
		Continuing Operations
					Acquisition-			Retirement-			Tax
					Related			Related			Reform			Operating
		GAAP			Adjustments*			Adjustments**			Impacts			(Non-GAAP)
Gross Profit		$	8,430		$	180		$	—		$	—		$	8,610
Gross Profit Margin			48.0	%		1.0	Pts		—			—			49.0	%
S,G&A			4,647			(279)			—			—			4,367
R,D&E			1,515			—			—			—			1,515
Other (Income) & Expense			253			(1)			(291)			—			(39)
Interest Expense			323			—			—			—			323
Total Expense & Other (Income)			6,603			(280)			(291)			—			6,032
Pre-tax Income from Continuing Operations			1,827			460			291			—			2,578
Pre-tax Income Margin from Continuing Operations			10.4	%		2.6	Pts		1.7	Pts		—			14.7	%
Provision for / (Benefit from) Income Taxes***			128			102			54			(21)			263
Effective Tax Rate			7.0	%		2.7	Pts		1.3	Pts		(0.8)	Pts		10.2	%
Income from Continuing Operations			1,698			358			237			21			2,315
Income Margin from Continuing Operations			9.7	%		2.0	Pts		1.4	Pts		0.1	Pts		13.2	%
Diluted Earnings / (Loss) Per Share: Continuing Operations		$	1.89		$	0.40		$	0.26		$	0.03		$	2.58

		Three Months Ended September 30, 2019
		Continuing Operations
					Acquisition-			Retirement-			Tax
					Related			Related			Reform			Operating
		GAAP			Adjustments*			Adjustments**			Impacts			(Non-GAAP)
Gross Profit		$	8,336		$	209		$	—		$	—		$	8,545
Gross Profit Margin			46.2	%		1.2	Pts		—			—			47.4	%
S,G&A			5,024			(451)			—			—			4,573
R,D&E			1,553			(53)			—			—			1,500
Other (Income) & Expense			(31)			10			(145)			—			(166)
Interest Expense			432			(24)			—			—			408
Total Expense & Other (Income)			6,813			(518)			(145)			—			6,150
Pre-tax Income from Continuing Operations			1,522			727			145			—			2,395
Pre-tax Income Margin from Continuing Operations			8.4	%		4.0	Pts		0.8	Pts		—			13.3	%
Provision for / (Benefit from) Income Taxes***			(151)			142			16			(5)			1
Effective Tax Rate			(9.9)	%		8.9	Pts		1.3	Pts		(0.2)	Pts		0.1	%
Income from Continuing Operations			1,673			586			130			5			2,394
Income Margin from Continuing Operations			9.3	%		3.3	Pts		0.7	Pts		0.0	Pts		13.3	%
Diluted Earnings / (Loss) Per Share: Continuing Operations		$	1.87		$	0.66		$	0.14		$	0.01		$	2.68

Contacts

IBM

Edward Barbini, 914‑499‑6565

barbini@us.ibm.com

John Bukovinsky, 732‑618‑3531

jbuko@us.ibm.com

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