IBM reports Q3 2015 earnings, cuts forecasts

IBM Ginni RomettyIBMIBM CEO Ginni Rometty

IBM just reported its Q3 earnings and it included some news investors didn’t want to hear, a miss on revenue and a warning that profits for the year are going to be lower than expected.

  • Earnings: Operating (non-GAAP): $US3.34. Analysts expected $US3.30 per share, non-GAAP, that’s a beat.
  • Revenue: $US19.3 billion. Analysts expected $US19.6 billion (down from $US22.4 billion a year ago), that’s a miss.

The stock is dropping in after hours trading, because IBM also cut its forecasts.

It now expects full-year 2015 operating (non-GAAP) EPS of $US14.75 to $US15.75, from its prior goal of $US15.75-$US16.50. Consensus is at $US15.68.

It expect full-year 2015 free cash flow to be relatively flat.

While IBM’s revenue miss and its lowered forecast are not great news, this isn’t a huge shock either.

IBM is going through a massive transformation right now, shedding shrinking hardware businesses and trying to build up new ones in cloud computing, big data, analytics, businesses it calls its “Strategic Imperatives.”

It’s old businesses are declining faster than its new ones are growing and so IBM is shrinking “by design,” CEO Ginni Rometty said last week.

Here’s the press release.

ARMONK, N.Y.–(BUSINESS WIRE)– IBM (NYSE:IBM)

  • Diluted EPS from continuing operations:

    • Operating (non-GAAP): $US3.34, down 9 per cent;
    • GAAP: $US3.02, down 13 per cent;
  • Net income from continuing operations:

    • Operating (non-GAAP): $US3.3 billion, down 11 per cent;
    • GAAP: $US3.0 billion, down 14 per cent;
  • Gross profit margin from continuing operations:

    • Operating (non-GAAP): 50.0 per cent, up 80 basis points;
    • GAAP: 48.9 per cent, up 40 basis points;
  • Revenue from continuing operations: $US19.3 billion:

    • Down 1 per cent adjusting for currency (9 points) and the divested System x business (4 points); down 14 per cent as reported;
  • Strategic imperatives revenue:

    • Up 27 per cent year-to-year, adjusting for currency and divested business; up 17 per cent as reported;
    • Up more than 30 per cent year-to-date adjusting for currency and divested business; up 20 per cent as reported:

      • Cloud revenue up more than 65 per cent year-to-date adjusting for currency and divested business; up more than 45 per cent as reported;

        • Total cloud revenue of $US9.4 billion over trailing 12 months;
        • For cloud delivered as a service, annual run rate of $US4.5 billion vs. $US3.1 billion in third-quarter 2014;
      • Business analytics revenue up 19 per cent year-to-date adjusting for currency; up 9 per cent as reported;
  • Services backlog of $US118 billion, up 1 per cent adjusting for currency;
  • Free cash flow of $US13.6 billion over trailing 12 months;
  • Total capital return to shareholders of $US8.7 billion over trailing 12 months; dividends of $US4.7 billion and gross share repurchases of $US4.0 billion;
  • Expect full-year 2015 operating (non-GAAP) EPS of $US14.75 to $US15.75;
  • Expect full-year 2015 free cash flow to be relatively flat.

IBM (NYSE: IBM) today announced third-quarter 2015 diluted earnings from continuing operations of $US3.02 per share, down 13 per cent year-to-year. Operating (non-GAAP) diluted earnings from continuing operations were $US3.34 per share, compared with operating diluted earnings of $US3.68 per share in the third quarter of 2014, a decrease of 9 per cent.

“In the third quarter we again made progress in the transformation of our business to higher value, with strong growth in our strategic imperatives and expanded operating margins, said Ginni Rometty, IBM chairman, president and chief executive officer. “We are continuing to make significant investments to build platforms around analytics, cloud, mobility and security that lay the foundation for a new era of cognitive business — where we see long-term value for our clients and shareholders.”

Third-quarter net income from continuing operations was $US3.0 billion compared with $US3.5 billion in the third quarter of 2014, a decrease of 14 per cent. Operating (non-GAAP) net income was $US3.3 billion compared with $US3.7 billion in the third quarter of 2014, a decrease of 11 per cent, impacted by currency.

Total revenues from continuing operations for the third quarter of 2015 of $US19.3 billion were down 14 per cent (down 1 per cent, adjusting for currency and the divested System x business) from the third quarter of 2014.

Third-Quarter GAAP Operating (non-GAAP) Reconciliation

Third-quarter operating (non-GAAP) diluted earnings exclude $US0.32 per share of charges: $US0.18 per share for the amortization of purchased intangible assets and other acquisition-related charges, and $US0.14 per share for non-operating retirement-related charges driven by changes to plan assets and liabilities primarily related to past market performance.

Full-Year 2015 Expectations

IBM expects full-year 2015 GAAP diluted earnings per share of $US13.25 to $US14.25, and operating (non-GAAP) diluted earnings per share of $US14.75 to $US15.75. IBM expects free cash flow to be relatively flat year-to-year. The 2015 operating (non-GAAP) earnings expectation excludes $US1.50 per share of charges for amortization of purchased intangible assets, other acquisition-related charges and retirement-related charges.

Strategic Imperatives

Revenues from the companys strategic imperatives — cloud, analytics, and engagement — increased 17 per cent year-to-year (up 27 per cent adjusting for currency and the divested System x business); increased 20 per cent year-to-date (up more than 30 per cent adjusting for currency and the divested System x business). Total cloud revenues (public, private and hybrid) increased more than 45 per cent (more than 65 per cent adjusting for currency and the divested System x business) year-to-date, and is $US9.4 billion over trailing 12 months. The annual run rate for cloud delivered as a service — a subset of the total cloud revenue — increased to $US4.5 billion from $US3.1 billion in the third quarter of 2014. Revenues from business analytics increased 9 per cent year-to-date (19 per cent adjusting for currency). Revenues year-to-date from mobile more than quadrupled, from security increased 6 per cent (12 per cent adjusting for currency) and from social increased 32 per cent (about 40 per cent adjusting for currency).

Geographic Regions

The Americas third-quarter revenues were $US9.1 billion, a decrease of 10 per cent (down 3 per cent adjusting for currency and the divested System x business) from the 2014 period. Revenues from Europe/Middle East/Africawere $US6.1 billion, down 16 per cent (up 1 per cent adjusting for currency and the divested System x business). Asia-Pacific revenues decreased 19 per cent (down 1 per cent adjusting for currency and the divested System x business) to $US4.1 billion. Revenues from the BRIC countries were down 30 per cent as reported (down 7 per cent adjusting for currency and the divested System x business).

Services

Global Technology Services segment revenues were down 10 per cent (up 1 per cent adjusting for currency and the divested System x business) to $US7.9 billion. Global Business Services segment revenues were down 13 per cent (down 5 per cent adjusting for currency) to $US4.2 billion.

The estimated services backlog as of September 30 was $US118 billion, up 1 per cent year-to-year adjusting for currency.

Software

Revenues from the Software segment were down 10 per cent to $US5.1 billion (down 3 per cent adjusting for currency) compared with the third quarter of 2014.

Revenues from IBMs key middleware products, which include WebSphere, Information Management, Tivoli, Workforce Solutions and Rational products, were $US3.4 billion, down 7 per cent (down 1 per cent adjusting for currency) year-to-year. Operating systems revenues of $US0.4 billion were down 14 per cent (down 7 per cent adjusting for currency) year-to-year.

Hardware

Revenues from the Systems Hardware segment totaled $US1.5 billion for the quarter, down 39 per cent (down 2 per cent adjusting for currency and the divested System x business) year-to-year.

Revenues from z Systems mainframe server products increased 15 per cent compared with the year-ago period (up 20 per cent adjusting for currency). Total delivery of z Systems computing power, as measured in MIPS (millions of instructions per second), increased 18 per cent. Revenues from Power Systems were down 3 per cent compared with the 2014 period (up 2 per cent adjusting for currency). Revenues from System Storage decreased 19 per cent (down 14 per cent adjusting for currency).

Financing

Global Financing segment revenues decreased 8 per cent (up 7 per cent, adjusting for currency) in the third quarter at $US0.4 billion.

Gross Profit

The companys total gross profit margin from continuing operations was 48.9 per cent in the 2015 third quarter compared with 48.6 per cent in the 2014 third quarter. Total operating (non-GAAP) gross profit margin from continuing operations was 50.0 per cent in the 2015 third quarter compared with 49.2 per cent in the 2014 third quarter, with an increase in Hardware and an improving segment mix partially offset by declines in Services.

Expense

Total expense and other income from continuing operations decreased to $US5.8 billion, down 11 per cent compared to the prior-year period, primarily due to the impact of currency. S,G&A expense of $US4.7 billion decreased 10 per cent year over year. R,D&E expense of $US1.3 billion decreased 5 per cent year-to-year; the related expense-to-revenue ratio increased to 6.7 per cent compared with 6.0 per cent in the year-ago period. Intellectual property and custom development income increased to $US188 million compared with $US145 million a year ago. Other (income) and expense was income of $US133 million compared with prior-year income of $US103 million. Interest expense decreased to $US117 million compared with $US126 million in the prior year.

Total operating (non-GAAP) expense and other income from continuing operations decreased to $US5.7 billion, down 12 per cent compared with the prior-year period. Operating (non-GAAP) S,G&A expense of $US4.6 billion decreased 11 per cent compared with prior-year expense. Operating (non-GAAP) R,D&E expense of $US1.3 billion decreased 7 per cent year-to-year; the related expense-to-revenue ratio increased to 6.6 per cent compared with 6.1 per cent in the year-ago period.

Pre-Tax Income

Pre-tax income from continuing operations decreased 17 per cent to $US3.6 billion. Pre-tax margin from continuing operations decreased 0.7 points to 18.8 per cent. Operating (non-GAAP) pre-tax income from continuing operations decreased 14 per cent to $US4.0 billion and pre-tax margin was 20.7 per cent, flat year to year.

***

IBMs tax rate from continuing operations was 18.2 per cent, down 2.6 points year over year; the operating (non-GAAP) tax rate was 18.0 per cent, down 2.8 points compared to the year-ago period.

Net income margin from continuing operations is essentially flat at 15.4 per cent. Total operating (non-GAAP) net income margin from continuing operations increased 0.6 points to 17.0 per cent.

The weighted-average number of diluted common shares outstanding in the third-quarter 2015 was 979 million compared with 998 million shares in the same period of 2014. As of September 30, 2015, there were 970 million basic common shares outstanding.

Debt, including Global Financing, totaled $US39.7 billion, compared with $US40.8 billion at year-end 2014. From a management segment view, Global Financing debt totaled $US26.0 billion versus $US29.1 billion at year-end 2014. The debt-to-equity ratio is 7.0 to 1. Core (non-global financing) debt totaled $US13.7 billion, an increase of $US2.0 billion since year-end 2014 and a decrease of $US3.4 billion from the third quarter of 2014. IBM ended the third-quarter 2015 with $US9.6 billion of cash on hand.

The company generated free cash flow of $US2.6 billion, excluding Global Financing receivables, up $US0.4 billion year over year. The company returned $US2.8 billion to shareholders through $US1.3 billion in dividends and $US1.5 billion of gross share repurchases. The balance sheet remains strong, and is well positioned to support the business over the long term.

Year-To-Date 2015 Results

Net income from continuing operations for the nine months ended September 30, 2015 was $US8.9 billion compared with $US10.2 billion in the year-ago period, a decrease of 13 per cent. Diluted earnings per share from continuing operations were $US9.03, down 11 per cent compared to the 2014 period.

Consolidated net income was $US8.7 billion compared to $US6.5 billion, including operating net losses in discontinued operations related to the divested Microelectronics business. Consolidated diluted earnings per share were $US8.85 compared to $US6.44, up 37 per cent year-to-year. Revenues from continuing operations for the nine-month period totaled $US59.7 billion, a decrease of 13 per cent (down 1 per cent year to year, adjusting for currency and divested businesses) compared with $US68.7 billion for the first nine months of 2014.

Operating (non-GAAP) net income from continuing operations for the nine months ended September 30, 2015 was $US10.0 billion compared with $US10.9 billion in the year-ago period, a decrease of 9 per cent. Operating (non-GAAP) diluted earnings per share from continuing operations were $US10.09 compared with $US10.76 per diluted share for the 2014 period, a decrease of 6 per cent.

NOW WATCH: A cargo ship that vanished in the Bahamas during Hurricane Joaquin is still missing

NOW WATCH: Tech Insider videos

Want to read a more in-depth view on the trends influencing Australian business and the global economy? BI / Research is designed to help executives and industry leaders understand the major challenges and opportunities for industry, technology, strategy and the economy in the future. Sign up for free at research.businessinsider.com.au.