IBM 2015 First-Quarter 10-Q Summary
Reporting period: Three months ended March 31, 2015. Financial statements are unaudited. Prior-year results were reclassified to present Microelectronics as discontinued operations; IBM also renamed Systems & Technology as Systems Hardware.
Financial results
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Revenue | $19.59 billion | $22.24 billion | Down 11.9% reported; flat after currency and divestiture adjustments |
| Gross profit margin | 48.2% | 47.8% | Up 0.5 percentage points |
| Continuing-operations pretax income | $3.00 billion | $3.18 billion | Down 5.7% |
| Continuing-operations income | $2.42 billion | $2.53 billion | Down 4.6% |
| Net income | $2.33 billion | $2.38 billion | Down 2.4% |
| Diluted EPS, continuing operations | $2.44 | $2.43 | Up 0.4% |
| Diluted EPS, total | $2.35 | $2.29 | Up 2.6% |
| Operating EPS, non-GAAP | $2.91 | $2.68 | Up 8.6% |
| Operating cash flow | $3.61 billion | $3.33 billion | Up $284 million |
| Free cash flow, as defined by IBM | $1.08 billion | $631 million | Up $450 million |
IBM reported a continuing-operations net margin of 12.3%, versus 11.4% a year earlier. Operating (non-GAAP) income was $2.89 billion, up 3.6%; operating margin was 14.8%, up 2.2 percentage points. IBM’s non-GAAP measure excludes specified acquisition-related and retirement-related items and is not directly comparable to similarly named measures at other companies.
Cash and marketable securities totaled $8.80 billion at quarter-end. Total debt was $38.83 billion, down $1.98 billion from year-end; long-term debt was $34.30 billion. Working capital was $10.68 billion and the current ratio was 1.30. Total liabilities were $99.75 billion and equity was $12.29 billion. IBM paid $1.09 billion in dividends and repurchased $1.17 billion of shares during the quarter; diluted weighted-average shares fell 4.7% year over year.
Changes and business performance
- Currency reduced reported revenue growth by approximately 8 percentage points, or $1.7 billion; divested businesses accounted for a further 4 points. IBM said revenue was flat after adjusting for both effects.
- Strategic imperatives revenue grew more than 20% reported and more than 30% adjusted for currency and divestitures. Cloud revenue grew over 60% reported; trailing-12-month cloud revenue was $7.7 billion, and the annual as-a-service run rate was $3.8 billion.
- Services revenue declined 11.6% reported and 2% adjusted for currency and divestitures. Software revenue fell 8.2% reported and 2% adjusted for currency.
- Systems Hardware revenue fell 22.6% reported, but grew 30% adjusted for the System x divestiture and currency. System z revenue more than doubled as the z13 product cycle began. Systems Hardware gross margin rose to 44.5% from 34.0%.
- Global Financing revenue fell 7.2% to $1.05 billion, pretax income fell 13.6% to $515 million, and return on equity declined to 35.6% from 41.2%. Its financing-receivables allowance coverage increased to 2.3% from 1.9% at year-end.
Operating cash flow benefited from lower tax payments, partly offset by lower cash collections from receivables and higher performance-based compensation payments. Cash used for share repurchases was substantially lower than in Q1 2014, when buybacks were $8.17 billion.
Outlook, commentary and risks
- For 2015, IBM maintained guidance of GAAP diluted EPS of $14.17–$14.92 and operating diluted EPS of $15.75–$16.50; it expected free cash flow to be flat versus 2014. Management expected no reported revenue growth for the year, citing currency and divestitures.
- At April 2015 exchange rates, IBM estimated currency and divestitures together would reduce full-year reported revenue growth by about 10 percentage points. It expected strategic-imperatives growth to return to 19%–20% for the year, while continuing to shift $4 billion of spending toward data, cloud and engagement.
- Management expected a 2015 effective tax rate of approximately 20%, retirement-related plan costs of about $2.6 billion, and retirement-plan cash disbursements of about $2.7 billion. It expected approximately $600 million in legally mandated non-U.S. pension contributions.
- A Spanish court ruling led IBM to record an additional $230 million pretax pension obligation in Q1; IBM appealed. Total retirement-related plan costs rose 51.6% year over year to $820 million.
- The Microelectronics business remained held for sale and was reported as discontinued operations. Its Q1 net loss was $88 million, versus $146 million in Q1 2014. IBM expected the GLOBALFOUNDRIES transaction to close in 2015; the filing notes estimated cash consideration of $1.5 billion, with $750 million due at closing, subject to adjustments and transaction conditions.
- IBM disclosed litigation, tax, environmental, employment and intellectual-property matters. It said recorded liabilities were not material, but it could not estimate reasonably possible losses for certain matters. Brazilian non-income-tax matters had a stated potential amount of approximately $525 million; IBM said it believed it would prevail and that the amount was not a meaningful indicator of liability.
- Management identified risks including weak client spending, execution of growth and productivity plans, currency fluctuations, cybersecurity and data privacy, pension and tax matters, customer credit, acquisitions and divestitures, and legal proceedings. IBM said disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- How much of reported revenue weakness reflects currency and divestitures versus underlying demand, particularly in services, software and growth markets.
- Whether strategic-imperatives growth, cloud run-rate expansion and the z13 product cycle translate into sustained revenue and margin improvement.
- Progress against 2015 EPS and free-cash-flow guidance, including the effect of currency, pension costs, workforce actions and share repurchases.
- Credit quality and reserve trends in Global Financing, alongside the decline in financing receivables and originations.
- Timing, final economics and remaining obligations associated with the Microelectronics divestiture, as well as outcomes of pension, tax and other material contingencies.