INTERNATIONAL BUSINESS MACHINES CORP quarterly report, Q2 FY2022

Full document

IBM Form 10-Q Summary

Business context and reporting period

International Business Machines Corporation reported the quarter and six months ended June 30, 2022. Results are presented under GAAP; comparisons generally use the corresponding 2021 periods. Following the November 2021 separation of Kyndryl, its historical results are reported as discontinued operations. IBM’s continuing business is organized around Software, Consulting, Infrastructure and Financing, with a hybrid cloud and AI strategy.

Key financial metrics

MetricQ2 2022Six months 2022
Revenue$15.535 billion, +9.3% reported; +15.6% at constant currency$29.732 billion, +8.5% reported; +13.3% at constant currency
Gross margin53.4%, down 1.9 percentage points52.6%, down 1.7 percentage points
Continuing-operations income$1.465 billion; diluted EPS $1.61$2.127 billion; diluted EPS $2.34
Net income, including discontinued operations$1.392 billion; diluted EPS $1.53$2.125 billion; diluted EPS $2.34
Operating earnings (non-GAAP)$2.105 billion; diluted EPS $2.31$3.376 billion; diluted EPS $3.71
Cash from operating activities$1.3 billion$4.569 billion, versus $7.539 billion in 2021
Free cash flow (non-GAAP)$2.1 billion$3.331 billion, versus $2.559 billion in 2021

Q2 segment revenue growth was strongest in Infrastructure (+19.0%) and Consulting (+9.8%); Software grew 6.4%. Financing revenue declined 29.9%. Management said incremental Kyndryl sales contributed approximately five percentage points to consolidated revenue growth in both Q2 and the first half.

At June 30, cash, restricted cash and marketable securities totaled $7.778 billion. Total debt was $50.309 billion, down $1.394 billion from year-end 2021. Current assets of $27.896 billion were below current liabilities of $31.844 billion; working capital was negative $3.948 billion and the current ratio was 0.88. IBM reported total assets of $127.503 billion and equity of $19.476 billion.

Material changes versus the prior comparable period

  • Continuing-operations income rose 80.8% in Q2 and 75.3% for the first half; Q2 diluted continuing-operations EPS increased from $0.90 to $1.61.
  • Reported consolidated net income increased 5.1% in Q2 but fell 6.8% for the first half. Prior-year results included Kyndryl income: discontinued operations contributed $515 million in Q2 2021 and $1.067 billion in the first half of 2021, compared with losses of $73 million and $2 million, respectively, in 2022.
  • Gross margin fell in both periods, which management attributed to higher labor and component costs, investment spending and business mix. Management said pricing actions were underway but would take time to flow through.
  • First-half operating cash flow declined by $2.970 billion year over year, primarily because of lower cash generated from financing receivables. First-half free cash flow increased by $0.772 billion.
  • Q2 revenue growth benefited from the z16 product cycle, particularly Infrastructure, as well as continuing strength in Consulting and Red Hat. Currency materially affected reported growth; constant-currency growth was higher.

Outlook, commentary, risks and unusual items

  • Management cited strong demand for hybrid cloud and AI solutions and said it expects continued progress in revenue growth and cash generation while maintaining a “solid and modestly growing” dividend policy. The filing does not provide a specific full-year revenue or earnings forecast.
  • Management reported more than 4,000 hybrid-cloud platform clients, including over 250 added in Q2. It also described continued investment in offerings, talent, partnerships and acquisitions.
  • IBM recorded a $232 million pre-tax gain on the healthcare software asset sale, which closed for the U.S. and Canada on June 30; remaining country closings were expected by Q1 2023. Management said further gains were not expected to be material.
  • IBM’s orderly wind-down of Russian operations reduced Q2 pre-tax income by approximately $100 million, including lost business and charges. Management said future revenue impact was not expected to be material to IBM overall, but noted Russia had historically been high margin and would remain a headwind to profit and cash flow. Broader effects of the war remain uncertain.
  • Retained Kyndryl shares and related financing arrangements generated mark-to-market losses. At June 30, the shares were valued at $436 million; the related swap had an $88 million fair-value liability, and secured borrowing was recorded at $218 million against contractual principal of $311 million. Settlement was expected no later than November 2, 2022.
  • IBM reported a $718 million direct-damages award and $718 million punitive-damages award in BMC litigation, plus interest and fees; IBM said it would appeal and did not believe it had material exposure, and recorded no material liability or related indemnification asset. In separate UK litigation, an appeals court awarded CISGIL approximately $89 million in additional damages, plus interest and costs; IBM applied for permission to appeal to the UK Supreme Court.
  • Other disclosed risks include cybersecurity and privacy, legal and tax proceedings, customer credit and financing risks, currency fluctuations, inflation and supply constraints, pension obligations, and execution of acquisitions and divestitures. IBM said it was in compliance with debt covenants. Its $10 billion revolving credit facilities had no borrowings at quarter-end.
  • Subsequent events: IBM issued $3.25 billion of fixed-rate notes on July 20, 2022. On July 25, the board approved a quarterly dividend of $1.65 per share, payable September 10, 2022.

Most important facts for investors to verify

  • How much future growth is organic and recurring versus currency effects, product cycles and incremental Kyndryl sales.
  • Whether pricing and productivity measures can offset labor, component and supplier costs and restore gross margins.
  • Cash conversion and financing-receivable trends, especially given the sharp year-over-year decline in first-half operating cash flow and negative working capital.
  • The valuation and settlement outcome of the retained Kyndryl shares, swap and secured borrowing.
  • Developments in the BMC and CISGIL cases, tax examinations and other contingencies, including any changes to recorded exposures.
  • Execution of the healthcare divestiture’s remaining closings and the effects of the Russia wind-down on profit and cash flow.