IBM 2021 Q1 Form 10-Q Summary
Reporting period: Three months ended March 31, 2021; unaudited consolidated results. Comparisons are with the three months ended March 31, 2020 unless stated otherwise. Dollar amounts are in U.S. dollars.
Business context and reporting period
IBM reported results across Cloud & Cognitive Software, Global Business Services (GBS), Global Technology Services (GTS), Systems and Global Financing. The company is pursuing a hybrid-cloud and AI strategy and plans to spin off its managed infrastructure services business as Kyndryl by the end of 2021, subject to customary conditions and final Board approval. The planned separation had not changed the quarter’s financial-statement or segment presentation.
Key financial metrics
| Metric | Q1 2021 | Prior comparable period / change |
|---|---|---|
| Revenue | $17.730 billion | $17.571 billion; up 0.9% reported, down 2.5% at constant currency |
| Gross profit / margin | $8.204 billion / 46.3% | $7.922 billion / 45.1%; margin expanded 1.2 points |
| Income from continuing operations | $956 million; diluted EPS $1.06 | $1.176 billion; diluted EPS $1.31 |
| Net income | $955 million | $1.175 billion |
| Operating earnings, non-GAAP | $1.599 billion; diluted EPS $1.77 | $1.649 billion; diluted EPS $1.84 |
| Cash from operating activities | $4.914 billion | $4.476 billion |
| Free cash flow, company-defined non-GAAP | $1.522 billion | $1.358 billion |
| Cash, restricted cash and marketable securities | $11.273 billion at March 31 | Down $3.002 billion from December 31, 2020 |
| Total debt | $56.404 billion at March 31 | Down $5.134 billion from December 31, 2020 |
| Working capital / current ratio | Negative $2.505 billion / 0.93:1 | Negative $705 million / 0.98:1 at December 31, 2020 |
Operating earnings and free cash flow are non-GAAP measures defined by IBM; they should be considered alongside the GAAP results. Q1 free cash flow included $0.6 billion of cash impacts from structural actions and spin-off-related charges. IBM paid $1.457 billion in dividends, or $1.63 per share, during the quarter.
Material changes versus the prior period
- Revenue increased slightly as reported but declined at constant currency. Total cloud revenue was $6.5 billion, up 21% reported and 17% at constant currency; excluding divested businesses, it grew 18% at constant currency.
- Cloud & Cognitive Software revenue rose 3.8% reported; GBS rose 2.4%; Systems rose 4.3%; GTS declined 1.5%; and Global Financing declined 20.0%.
- Gross margin improved, while GAAP continuing-operations income and diluted EPS fell. The prior-year quarter included a $1.226 billion income-tax benefit, primarily from an intra-entity intellectual-property sale; the 2021 quarter’s $51 million tax benefit mainly reflected resolution of tax audit matters.
- Total expense and other income fell 8.4%, principally reflecting lower workforce-rebalancing charges, reduced travel and other spending, and lower expected-credit-loss expense. Workforce-rebalancing charges were $146 million versus $728 million.
- Cash from operations rose $438 million. Investing used $2.0 billion, including $1.120 billion for acquisitions; financing used $5.783 billion, including $4.261 billion of debt repayments and $1.457 billion of dividends.
- Debt declined by $5.134 billion during the quarter. IBM Credit early redeemed $1.75 billion of fixed-rate debt and recorded an approximately $22 million loss on redemption.
Outlook, management commentary and risks
- Management said the spending environment was beginning to improve, with better project activity and client-business volumes, and reported sequential year-to-year revenue improvement from Q4 2020. It highlighted ongoing investment in hybrid cloud, AI, skills, ecosystem partnerships and innovation. No specific full-year revenue or EPS guidance is provided in the supplied filing text.
- IBM remained on track to complete the Kyndryl separation by year-end 2021. The filing notes execution, regulatory, market, disruption, cost and anticipated-benefit risks related to the transaction.
- Management intends to continue deleveraging through 2021 and pursue revenue growth and cash generation while maintaining a “solid and modestly growing” dividend policy. On April 27, 2021, the Board approved an increase in the quarterly dividend to $1.64 per share, payable June 10, 2021.
- IBM expected 2021 contributions to all retirement-related plans of approximately $2.3 billion and pre-tax retirement-related plan cost of approximately $2.9 billion. Management said pension funding was well funded overall and expected no significant change to plan contributions from the 2020 Annual Report outlook.
- Risks include COVID-19 and uneven recovery, client spending, currency movements, customer credit and financing risks, competition and innovation execution, cybersecurity and privacy, acquisitions, pension obligations, litigation, tax matters, and the proposed Kyndryl separation. Services backlog was $104.8 billion, down 2.8% reported (6.5% at constant currency); signings fell 24.6% to $6.733 billion. Backlog and signings are management estimates and may not convert to revenue as expected.
- The IRS proposed adjustments to 2013 cross-border transactions that, if sustained, would add approximately $4.5 billion of taxable income; IBM disputes the position and filed an Appeals protest. IBM also disclosed approximately $700 million of potential Brazilian non-income-tax matters, which it believes it will prevail on and says is not a meaningful indicator of liability. The filing says recorded legal liabilities were not material; reasonably possible losses generally could not be estimated.
- A UK court required IBM to pay approximately $20 million, plus interest and litigation costs, in the CISGIL dispute; CISGIL was expected to seek permission to appeal. A separate ERISA matter reached a settlement agreement subject to court approval.
Important facts for investors to verify
- Whether revenue growth becomes positive at constant currency and how much reported growth reflects currency effects; monitor cloud growth and performance by segment.
- Whether the Kyndryl spin-off completes by year-end 2021, its final terms and costs, and the operational and financial effects on IBM and GTS.
- Cash conversion and the sustainability of free cash flow after acquisitions, restructuring and spin-off costs, dividends and debt repayments.
- Debt reduction, liquidity and the negative working-capital position; note that IBM reported $15.25 billion of unused credit facilities and no borrowings under those facilities at March 31.
- Developments in the IRS and Brazilian tax matters, the CISGIL appeal, and other contingencies for which IBM says potential losses may be difficult to estimate.
- Management’s non-GAAP adjustments and assumptions, including excluded acquisition, amortization, retirement-related and spin-off items, alongside GAAP earnings and cash-flow measures.