IBM Q1 2023 Form 10-Q Summary
Business context and reporting period
International Business Machines Corporation (IBM) reported unaudited results for the three months ended March 31, 2023, compared with the same period in 2022. Its reportable segments are Software, Consulting, Infrastructure and Financing. IBM’s strategy centers on hybrid cloud and artificial intelligence (AI). Unless stated otherwise, financial amounts below are in U.S. dollars.
Key financial metrics
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Revenue | $14.252 billion | $14.197 billion | Up 0.4% reported; up 4.4% adjusted for currency |
| Gross profit / margin | $7.509 billion / 52.7% | $7.335 billion / 51.7% | Margin up 1.0 percentage point |
| Income from continuing operations | $934 million | $662 million | Up 41.1% |
| Net income | $927 million | $733 million | Up 26.5% |
| Diluted EPS, continuing operations | $1.02 | $0.73 | Up 39.7% |
| Operating (non-GAAP) earnings / diluted EPS | $1.249 billion / $1.36 | $1.271 billion / $1.40 | Earnings down 1.8%; EPS down 2.9% |
| Cash from operating activities | $3.774 billion | $3.248 billion | Up $525 million |
| Free cash flow (company-defined, non-GAAP) | $1.340 billion | $1.240 billion | Up $100 million |
IBM’s GAAP continuing-operations margin was 6.6%, versus 4.7%. Operating (non-GAAP) continuing-operations margin was 8.8%, versus 9.0%. The reported GAAP improvement partly reflects comparison with prior-year Kyndryl-related and retirement costs; operating earnings declined year over year.
Revenue by segment: Software $5.921 billion, up 2.6% reported (5.6% adjusted for currency); Consulting $4.962 billion, up 2.8% (8.2% adjusted); Infrastructure $3.098 billion, down 3.7% (up 0.1% adjusted); Financing $196 million, up 27.3% (31.0% adjusted). Software and Consulting led reported growth; Infrastructure Support weakness offset growth in zSystems.
At March 31, cash, restricted cash and marketable securities totaled $17.592 billion, up $8.752 billion from year-end. Total debt was $58.712 billion, up $7.764 billion, primarily following debt issuance. Current assets were $35.982 billion and current liabilities $30.993 billion; working capital was $4.989 billion and the current ratio 1.16, compared with negative working capital of $2.387 billion and a 0.92 current ratio at December 31, 2022. IBM paid $1.497 billion in dividends. Operating cash flow less the company-defined free-cash-flow adjustments produced $1.340 billion of free cash flow.
Material changes versus the prior comparable period
- Revenue was nearly flat as reported, but grew 4.4% adjusted for currency. Currency translation and hedging reduced reported performance; management estimated a roughly $150 million impact on GAAP pre-tax profit growth and roughly $160 million on operating pre-tax profit growth.
- Gross margin improved, while GAAP income from continuing operations rose substantially. IBM attributed the change in expenses partly to the absence of the prior-year $222 million unrealized loss on retained Kyndryl shares, lower non-operating retirement costs, higher interest income and productivity benefits.
- Operating earnings declined despite revenue growth. A first-quarter workforce rebalancing charge of approximately $260 million reduced GAAP and operating diluted EPS by about $0.22, according to management.
- Interest expense was $367 million, versus $311 million. Total retirement-related plan cost fell to $314 million from $510 million, principally reflecting lower recognized actuarial losses.
- Investing cash outflow increased to $7.960 billion from $1.358 billion, largely due to net purchases of marketable securities and other investments. Financing cash inflow rose to $5.708 billion, primarily reflecting higher net debt proceeds.
Outlook, management commentary and risks
IBM did not provide a specific full-year revenue, earnings or free-cash-flow forecast in the supplied filing text. Management said it expects continued progress as a hybrid cloud and AI company, with a focus on revenue growth and cash generation. It cited sustained client demand for offerings supporting digital transformation, modernization, automation and productivity, while noting deceleration in Consulting growth from prior robust levels, particularly for U.S. discretionary projects. Pricing and productivity actions are expected to support margin improvement through 2023.
IBM reported issuing approximately $9.5 billion of debt in Q1 to plan for maturities through 2024; it stated liquidity remained strong and $10 billion of revolving credit facilities were undrawn. The company expects approximately $2.1 billion of retirement-plan contributions in 2023 and approximately $1.2 billion of retirement-related plan cost. On April 25, 2023, the Board approved an increase in the quarterly dividend to $1.66 per share, payable June 10, 2023.
Notable estimates and exposures include a $74 million pre-tax benefit in Q1 from extending estimated useful lives of certain server and network equipment; the estimate change added about $0.06 to basic and diluted EPS. The effective GAAP tax rate was 11.7%, compared with a prior-year tax benefit and a negative 6.3% effective rate. IBM cited currency movements, economic and client-spending conditions, cybersecurity and privacy, talent retention, acquisitions, intellectual property, pension plans, customer credit and legal and tax proceedings among risks.
Contingencies include IBM’s claim against GlobalFoundries seeking more than $1.5 billion; the claims were proceeding. In the BMC litigation, a trial court awarded $718 million in direct damages plus $718 million in punitive damages, interest and fees; IBM appealed and recorded no material liability or related indemnification asset. IBM also disclosed approximately $400 million of potential Brazilian non-income-tax matters, which it believes it will prevail on, and an IRS proposal that, if sustained, would result in approximately $4.5 billion of additional taxable income. Management said recorded legal liabilities and quarter changes were not material, but could not estimate reasonably possible losses for many proceedings.
Most important facts for investors to verify
- Whether Software and Consulting growth can offset Infrastructure Support declines, and whether Consulting deceleration persists; consider both reported and currency-adjusted comparisons.
- How recurring the Q1 GAAP earnings increase is, given the workforce rebalancing charge, useful-life estimate benefit, prior-year Kyndryl loss and retirement-cost comparisons; compare GAAP with IBM’s non-GAAP measures.
- Debt maturity, refinancing and interest-cost trends following the $9.5 billion of Q1 debt issuance, and the balance between debt, liquidity, investment and dividends.
- Cash-flow conversion and free cash flow, including IBM’s definition and the impact of financing receivables, capital spending, working capital and dividends.
- Developments in the GlobalFoundries, BMC, securities, pension and tax matters, including the IRS and Brazilian tax exposures; outcomes and potential losses are uncertain.
- Progress against the stated growth and cash-generation outlook, pension contribution expectations and the announced dividend increase.