IBM Form 10-Q Summary
Business context and reporting period. International Business Machines Corporation (IBM) reported unaudited results for the quarter and six months ended June 30, 2023, compared with the same periods in 2022. IBM’s stated focus is hybrid cloud and enterprise AI; its reportable segments are Software, Consulting, Infrastructure and Financing.
Financial performance
| Metric | Q2 2023 | Q2 2022 | First half 2023 | First half 2022 |
|---|---|---|---|---|
| Revenue | $15.475 billion | $15.535 billion | $29.727 billion | $29.732 billion |
| Gross margin | 54.9% | 53.4% | 53.9% | 52.6% |
| Income from continuing operations | $1.581 billion | $1.465 billion | $2.515 billion | $2.127 billion |
| Diluted GAAP EPS from continuing operations | $1.72 | $1.61 | $2.74 | $2.34 |
| Operating (non-GAAP) earnings | $2.003 billion | $2.105 billion | $3.252 billion | $3.376 billion |
| Diluted operating (non-GAAP) EPS | $2.18 | $2.31 | $3.54 | $3.71 |
Q2 revenue decreased 0.4% as reported and increased 0.4% adjusted for currency. First-half revenue was flat as reported and grew 2.3% at constant currency. GAAP diluted EPS from continuing operations rose 6.8% in Q2 and 17.1% in the first half; operating non-GAAP diluted EPS fell 5.6% and 4.6%, respectively. IBM’s non-GAAP operating measure excludes specified acquisition, retirement, tax-reform and Kyndryl-related items; it is not a GAAP measure.
Segments. Q2 Software revenue rose 7.2% (7.5% adjusted for currency) and Consulting rose 4.3% (5.9% adjusted). Infrastructure fell 14.6% (13.8% adjusted), which IBM attributed primarily to product-cycle dynamics, including lower zSystems revenue versus a strong prior-year period. Financing revenue increased 26.2%, while segment pre-tax income fell 36.8%. For the first half, Software revenue rose 5.0%, Consulting 3.5%, and Infrastructure declined 9.9% as reported.
Cash flow and liquidity. First-half cash from operating activities was $6.412 billion, up from $4.569 billion. IBM-defined free cash flow was $3.441 billion versus $3.331 billion. Q2 operating cash flow was $2.6 billion and free cash flow was $2.1 billion. First-half investing activities used $7.953 billion, primarily reflecting net purchases of marketable securities and other investments; financing activities provided $2.978 billion.
At June 30, cash, restricted cash and marketable securities totaled $16.329 billion, up $7.489 billion from year-end 2022. Total debt was $57.476 billion, up $6.527 billion, primarily reflecting first-quarter debt issuance. Working capital was $1.945 billion and the current ratio was 1.06, compared with negative working capital of $2.387 billion and a 0.92 current ratio at December 31, 2022. IBM reported $10 billion of undrawn revolving credit facilities and stated it was in compliance with debt covenants.
Material changes and unusual items
- IBM recorded workforce-rebalancing charges of $117 million in Q2 and $376 million in the first half, to address remaining stranded costs from portfolio actions.
- A change in estimated useful lives for server and network equipment increased pre-tax income by $57 million in Q2 and $131 million in the first half. This accounting-estimate change took effect January 1, 2023.
- Q2 GAAP results benefited from comparison with the prior-year healthcare software divestiture gain of approximately $230 million. The prior-year period also included Kyndryl-related losses and higher non-operating retirement costs. These comparisons contributed to GAAP and adjusted earnings trends differing.
- IBM completed six acquisitions in the first half for aggregate consideration of $423 million. It agreed to acquire Apptio for estimated cash consideration of $4.6 billion; closing was expected in the second half of 2023, subject to customary conditions, including regulatory clearance.
- Remaining performance obligations were $58 billion at June 30; IBM estimated about 72% would be recognized over the subsequent two years. The disclosure excludes certain contracts, and estimates can change.
Outlook, commentary and risks
Management expressed confidence in its hybrid cloud and AI strategy and emphasized revenue growth, cash generation, productivity initiatives and continued investment. It described demand for larger Consulting transformation projects as solid, while noting delays in some discretionary projects, particularly in the U.S. Infrastructure revenue remained subject to product-cycle comparisons. IBM also cited the U.S. dollar as a headwind; hedging defers, but does not eliminate, currency impacts. The filing does not provide a clear quantified full-year revenue or earnings forecast.
Management expected approximately $2.0 billion of 2023 contributions to retirement-related plans and approximately $1.2 billion of 2023 pre-tax retirement-related plan cost. IBM said it had no change to expected plan contributions and that no 2023 contribution was legally required for U.S. defined-benefit pension plans. The Board approved a quarterly dividend of $1.66 per share, payable September 9, 2023.
Risks include economic and client-spending weakness, competition and execution of innovation initiatives, currency movements, acquisition integration and higher debt, cybersecurity and privacy threats, customer credit risk, pension assumptions, tax matters and legal proceedings. Significant matters disclosed include IBM’s disputed IRS cross-border tax adjustments involving approximately $4.5 billion of proposed additional taxable income; Brazilian non-income-tax matters with approximately $450 million of potential amounts, which IBM believes it will prevail on; and the BMC litigation, where a trial court awarded $718 million in direct damages plus $718 million in punitive damages, interest and fees. IBM appealed, stated it does not believe it has material exposure, and recorded no material liability or related indemnification asset. IBM noted that outcomes and potential losses in many proceedings cannot be reliably estimated.
Investor facts to verify
- Whether Software and Consulting growth and margin gains can continue, and whether Infrastructure rebounds as product-cycle comparisons ease.
- How much reported growth and profit remain affected by currency, workforce-rebalancing costs and the useful-life estimate change.
- The sustainability and composition of free cash flow, including the impact of working capital, financing receivables, debt issuance and marketable-security purchases.
- Debt maturities, interest expense and liquidity after the first-half increase in debt; also monitor completion, price and integration of the announced Apptio acquisition.
- Developments in the IRS, Brazilian tax and BMC matters, along with other legal contingencies for which IBM says potential losses are not reasonably estimable.