IBM Q1 2022 Form 10-Q Summary
Reporting period: Three months ended March 31, 2022. Amounts are in U.S. dollars; financial statements are unaudited. Following the November 2021 separation of Kyndryl, its historical results are presented as discontinued operations and excluded from continuing operations.
Financial performance
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Revenue | $14.197 billion | $13.187 billion | +7.7% reported; +10.9% adjusted for currency |
| Gross profit margin | 51.7% | 53.3% | Down 1.6 points |
| Continuing-operations income | $662 million | $403 million | +64.3% |
| Net income, including discontinued operations | $733 million | $955 million | Down 23.3% |
| Diluted EPS from continuing operations | $0.73 | $0.45 | +62.2% |
| Consolidated diluted EPS | $0.81 | $1.06 | Down 23.6% |
| Operating earnings and diluted EPS (non-GAAP) | $1.271 billion; $1.40 | $1.013 billion; $1.12 | Earnings +25.5%; EPS +25.0% |
Software revenue rose 12.3%, Consulting 13.3%, while Infrastructure declined 2.3% and Financing declined 26.2%. Hybrid-cloud revenue was $5.009 billion, up 14% reported. Management said incremental sales to Kyndryl contributed more than five percentage points to consolidated revenue growth. Consulting signings increased 35.3% reported, with a book-to-bill ratio of 1.1.
Cash flow: Operating cash flow was $3.248 billion, versus $4.914 billion. Free cash flow, IBM’s non-GAAP measure, was $1.240 billion, versus $1.522 billion. Both cash-flow presentations include discontinued operations. IBM paid $1.475 billion in dividends and invested $698 million in acquisitions.
Balance sheet and liquidity: Cash, restricted cash and marketable securities totaled $10.769 billion at March 31, up $3.213 billion from year-end. Total debt was $54.234 billion, up $2.531 billion; total liabilities were $114.162 billion and equity was $19.112 billion. Working capital was negative $2.726 billion and the current ratio was 0.92. IBM reported $10 billion of revolving credit facilities with no borrowings outstanding and stated it was in compliance with debt covenants.
Material changes and unusual items
- Continuing-operations revenue and earnings improved, but consolidated net income and EPS fell because Q1 2021 included a full quarter of Kyndryl results in discontinued operations. Q1 2022 discontinued-operations income was $71 million, including a $68 million pre-tax gain on the sale of a joint venture.
- IBM recorded a $222 million unrealized loss on its retained Kyndryl shares. The shares’ reported fair value was $585 million at quarter-end, compared with $807 million at December 31, 2021.
- GAAP continuing operations recorded a $39 million income-tax benefit, versus a $160 million benefit in the prior year. The prior-year benefit primarily reflected resolution of tax audits. IBM’s non-GAAP operating results exclude specified items, including acquisition-related charges, amortization, certain retirement costs and Kyndryl-related impacts; comparisons should be read alongside the GAAP results.
- IBM completed three acquisitions for an aggregate purchase price of $798 million. It also agreed to sell healthcare data and analytics assets for $1.065 billion; the phased transaction remained subject to regulatory clearances and closing conditions.
Outlook, management commentary and risks
- Management described demand for technology and consulting as strong and said expectations for 2022 remained aligned with the company’s previously communicated mid-term financial model. The filing provides no specific new full-year revenue, earnings or free-cash-flow guidance.
- IBM emphasized continued investment in hybrid cloud, AI, research and development, its partner ecosystem and talent. It cited more than 4,000 hybrid-cloud platform clients, including 200 added in Q1.
- Management said gross margin was pressured by investment spending and Infrastructure product-cycle mix. Consulting margins also faced investment needs and a competitive, inflationary labor market; the company expects pricing actions to take a few quarters to flow through.
- IBM suspended business activities in Russia in March. It reported no material Q1 financial impact and did not expect a significant impact on future results or financial position, but noted that Russia had historically been high margin and could weigh on profit and cash flow. Supply-chain disruption, inflation, cybersecurity and geopolitical instability were also cited as challenges.
- Legal matters include an April 2022 appellate award of approximately $89 million plus interest and costs in the CISGIL dispute, which IBM intends to appeal; IBM’s claims against GlobalFoundries seeking more than $1.5 billion; and a newly filed putative securities class action alleging misclassification of strategic-imperatives revenue. IBM stated that reasonably possible losses generally could not be estimated; recorded legal liabilities were not material.
- IBM disclosed approximately $450 million of potential Brazilian non-income-tax matters and an IRS dispute concerning proposed adjustments that, if sustained, would add approximately $4.5 billion of taxable income. The company said it disputes the IRS position and believes adequate tax provisions have been recorded.
- The board approved an increase in the quarterly dividend to $1.65 per share, payable June 10, 2022. The filing also says the share repurchase program remained suspended.
Important facts for investors to verify
- How much of reported growth and future revenue reflects incremental Kyndryl sales, and how will that contribution evolve?
- Whether Consulting and Infrastructure margins recover as pricing, investment and product-cycle effects change.
- Cash conversion, free cash flow, debt levels and the capacity to fund acquisitions and dividends.
- Completion, proceeds and final gain from the healthcare-assets divestiture, and IBM’s planned disposition of its retained Kyndryl shares.
- Developments in the CISGIL, GlobalFoundries, securities-class-action and tax matters, including potential financial exposure.
- Effects of the Russia suspension, currency movements, supply-chain conditions and inflation on results and cash flows.