IBM 10-Q Summary — Quarter Ended September 30, 2023
Business context and period. International Business Machines Corporation reported unaudited results for the third quarter and first nine months of 2023, compared with the corresponding 2022 periods. Its reportable businesses are Software, Consulting, Infrastructure and Financing. IBM describes its strategy as focused on hybrid cloud and AI, supported by investment, acquisitions and productivity initiatives.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $14.752 billion | $14.107 billion | $44.479 billion | $43.840 billion |
| Gross margin | 54.4% | 52.7% | 54.0% | 52.6% |
| Income/(loss) from continuing operations | $1.714 billion | $(3.214) billion | $4.229 billion | $(1.087) billion |
| Diluted GAAP EPS from continuing operations | $1.86 | $(3.55) | $4.59 | $(1.21) |
| Operating non-GAAP diluted EPS | $2.20 | $1.81 | $5.74 | $5.52 |
- Revenue increased 4.6% in Q3 (3.5% at constant currency) and 1.5% year to date (2.7% at constant currency). Software grew 7.8% in Q3 and 5.9% year to date; Consulting grew 5.6% and 4.2%, respectively. Infrastructure declined 2.4% in Q3 and 7.6% year to date.
- Q3 GAAP results improved sharply versus 2022 largely because the prior-year period included a $5.9 billion non-cash pension settlement charge ($4.4 billion after tax). The charge also distorted year-to-date comparisons. For additional context, operating non-GAAP earnings rose 22.8% in Q3 and 5.0% year to date; this measure excludes specified items and is not GAAP.
- Q3 segment revenue/pre-tax income: Software $6.265 billion/$1.486 billion; Consulting $4.963 billion/$509 million; Infrastructure $3.272 billion/$387 million; Financing $186 million/$91 million. IBM attributed margin gains broadly to portfolio mix, productivity and pricing actions.
- Cash from operating activities was $3.1 billion in Q3 and $9.468 billion for the first nine months. Management-defined free cash flow was $1.7 billion in Q3 and $5.123 billion year to date, up $1.041 billion from the prior-year nine-month period. The company paid $4.522 billion in dividends year to date.
- At September 30, cash, restricted cash and marketable securities totaled $10.996 billion; total debt was $55.242 billion, up $4.293 billion from year-end 2022. Current assets were $27.705 billion and current liabilities $30.606 billion; working capital was negative $2.900 billion and the current ratio 0.91.
- Total assets were $129.321 billion, liabilities $106.165 billion and equity $23.156 billion. Nine-month investing cash outflow was $9.906 billion, including $4.945 billion for acquisitions; financing cash outflow was $154 million. Cash, cash equivalents and restricted cash declined $713 million over the period.
- Interest expense rose 33.2% year to date to $1.202 billion, primarily reflecting higher average rates and debt. IBM reported $55 billion in remaining performance obligations; approximately 71% is expected to be recognized in the following two years, subject to the filing’s stated exclusions and estimates.
Material changes and unusual items
- IBM completed seven acquisitions in the first nine months, including Apptio, whose purchase price was $4.610 billion. Goodwill increased to $59.596 billion, primarily reflecting acquisition activity, including Apptio. IBM subsequently acquired Manta in October; purchase accounting was not complete at the filing date.
- IBM agreed to sell The Weather Company assets for $1.1 billion, including $250 million of contingent consideration. Closing was expected in Q1 2024, subject to customary conditions; the business was classified as held for sale at quarter-end.
- Workforce rebalancing charges were $410 million for the first nine months, including $34 million in Q3. IBM said the actions address remaining stranded costs from prior portfolio changes.
- A change in estimated useful lives for server and network equipment increased pre-tax income by $44 million in Q3 and $175 million year to date, according to the filing.
- IBM’s reported tax rate and comparative earnings were affected by the prior-year pension settlement and other discrete tax factors. The 2023 GAAP effective tax rate was 8.5% for Q3 and 14.2% year to date.
Outlook, management commentary and risks
- Management stated it expects continued progress in revenue growth and cash generation, but the filing provides no specific full-year revenue or free-cash-flow target in the supplied text. IBM said it was ahead of pace toward its target of $2.0 billion in productivity savings by the end of 2024.
- IBM said consulting pricing and productivity actions were expected to support further margin improvement through the remainder of 2023. It also described continued investment in hybrid cloud, AI and quantum computing, including watsonx products.
- Management expected approximately $1.9 billion of 2023 contributions to all retirement-related plans and approximately $1.2 billion of 2023 pre-tax retirement-related plan cost. It reported no legally required U.S. defined-benefit pension contributions in 2023.
- Management cited macroeconomic and geopolitical uncertainty, higher interest rates, currency movements, client spending, labor and component costs, and infrastructure product-cycle dynamics. Other disclosed risks include acquisition integration and higher debt, cybersecurity and data privacy, intellectual property disputes, customer credit, tax examinations, litigation, pension plans and foreign exchange.
- Contingencies include IBM’s lawsuit against GlobalFoundries seeking more than $1.5 billion; a BMC judgment of $718 million in direct damages plus $718 million in punitive damages, which IBM appealed and for which it recorded no material liability; and Brazilian non-income-tax matters with approximately $400 million of potential exposure, which IBM said it believes it will prevail on. IBM stated it could not estimate reasonably possible losses for many proceedings.
- The IRS issued a revised report concerning 2013 U.S. tax returns; if sustained, its adjustments would result in approximately $4.2 billion of additional taxable income. IBM strongly disagrees and plans to pursue resolution through Appeals and, if necessary, court.
- IBM reported effective disclosure controls and procedures and no material quarterly change in internal control over financial reporting. The board approved a quarterly dividend of $1.66 per share, payable December 9, 2023.
Important facts for investors to verify
- Whether revenue and margin momentum in Software and Consulting can offset continuing Infrastructure declines and currency effects.
- How much of reported earnings and cash generation is recurring, and how operating non-GAAP results reconcile to GAAP results, including the effects of acquisition-related exclusions.
- Debt maturities, refinancing costs and liquidity headroom, especially given debt growth, negative working capital and ongoing acquisition spending.
- Progress toward the $2.0 billion productivity-savings target, the realization of acquisition synergies, and the timing and proceeds of The Weather Company sale.
- Updates on the BMC appeal, GlobalFoundries litigation, IRS examination and other legal or tax matters, including any change in recorded liabilities or potential exposure.