IBM Reports Earnings: A Much-Needed Beat On Revenue And Profits

Ginni RomettyAP Photo/Manu FernandezIBM CEO Ginni Rometty

IBM just reported its quarterly earnings and it’s full of good news.

It reported darnings per share of $US4.32 and revenue of $US24.36 billion.

That’s a beat, all the way around.

Wall Street analysts expected $US4.29 cents EPS on $US24.12 billion in revenue. The expectations for revenue were modest, a 3% decline. IBM still reported a decline, but of only 2%.

The expectations for profits were significantly higher as IBM marches toward its promised $US20 EPS by 2015. IBM reported $US3.22 EPS in the year-ago quarter.

The company also reiterated its EPS guidance for the full-year of at least $US18.

This is an important beat for IBM. Revenues at IBM have been shrinking for a while and it’s been struggling to hit Wall Street’s revenue expectations for more than a year now. During fiscal 2013 it missed expectations four times in a row. It also missed on revenue for its first quarter 2014.

In May, CEO Ginni Rometty said that growing revenue was “not the No. 1 priority on my list.” Instead, she’s trimming the company’s least profitable business units (commodity hardware) and shifting resources to new, growing and more profitable areas (namely cloud computing). She’s laying off thousands of workers in the process and hiring thousands of others with new skill sets.

“We don’t want empty calories,” Rometty told the New York Times. “So when people keep pushing us for growth, that is not the number one priority on my list.”

Here’s the relevant parts of the press release:

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

Diluted EPS:

GAAP: $US4.12, up 42 per cent;

Operating (non-GAAP): $US4.32, up 34 per cent;

Net income:

GAAP: $US4.1 billion, up 28 per cent;

Operating (non-GAAP): $US4.3 billion, up 21 per cent;

Gross profit margin:

GAAP: 49.1 per cent, up 50 basis points;

Operating (non-GAAP): 49.8 per cent, up 10 basis points;

Revenue: $US24.4 billion:

Down 2 per cent; down 1 per cent adjusting for divested customer care outsourcing business;

Software, Services adjusting for divested customer care outsourcing business and Global Financing grew; Systems and Technology declined;

Services backlog of $US136 billion, down 1 per cent adjusting for divested customer care outsourcing business;

Strategic growth initiatives grew double digits:

Cloud revenue up more than 50 per cent year-to-date;

For cloud delivered as a service, second-quarter annual run rate up nearly 100 per cent to $US2.8 billion year-to-year;

Business analytics revenue up 7 per cent year-to-date;

Mobile revenue up more than 100 per cent year-to-date;

Security revenue up more than 20 per cent year-to-date;

Continue to expect full-year operating (non-GAAP) EPS of at least $US18.00.

IBM (NYSE:IBM) today announced second-quarter 2014 diluted earnings of $US4.12 per share, compared with diluted earnings of $US2.91 per share in the second quarter of 2013, an increase of 42 per cent. Operating (non-GAAP) diluted earnings were $US4.32 per share, compared with operating diluted earnings of $US3.22 per share in the second quarter of 2013, an increase of 34 per cent.

Second-quarter net income was $US4.1 billion compared with $US3.2 billion in the second quarter of 2013, an increase of 28 per cent. Operating (non-GAAP) net income was $US4.3 billion compared with $US3.6 billion in the second quarter of 2013, an increase of 21 per cent. The year-to-year results include the impact of a charge in the prior year period of $US1 billion for workforce rebalancing.

Total revenues for the second quarter of 2014 of $US24.4 billion were down 2 per cent (down 1 per cent, as reported and adjusting for currency, adjusting for the divested customer care outsourcing business) from the second quarter of 2013.

In the second quarter, we made further progress on our transformation. We performed well in our strategic imperatives around cloud, big data and analytics, security and mobile, said Ginni Rometty, IBM chairman, president and chief executive officer. We will continue to extend and leverage our unique strengths to address the emerging trends in enterprise IT and transform our business, positioning ourselves for growth over the long term.

Second-Quarter GAAP Operating (non-GAAP) Reconciliation

Second-quarter operating (non-GAAP) diluted earnings exclude $US0.20 per share of charges: $US0.16 per share for the amortization of purchased intangible assets and other acquisition-related charges, and $US0.04 per share for non-operating retirement-related charges driven by changes to plan assets and liabilities primarily related to market performance.

Full-Year 2014 Expectations

IBM expects full-year 2014 GAAP diluted earnings per share of at least $US17.00, and operating (non-GAAP) diluted earnings per share of at least $US18.00. The 2014 operating (non-GAAP) earnings expectations exclude $US1.00 per share of charges for amortization of purchased intangible assets, other acquisition-related charges, and retirement-related charges.

Geographic Regions

The Americas second-quarter revenues were $US10.6 billion, a decrease of 1 per cent (up 1 per cent, adjusting for currency) from the 2013 period. Revenues from Europe/Middle East/Africa were up 1 per cent at $US7.9 billion (down 3 per cent adjusting for currency). Asia-Pacific revenues decreased 9 per cent (down 6 per cent adjusting for currency) to $US5.3 billion. OEM revenues were $US433 million, down 19 per cent (down 19 per cent adjusting for currency) compared with the 2013 second quarter.

Growth Markets

Revenues from the companys growth markets were down 7 per cent (down 4 per cent, adjusting for currency). Revenues in the BRIC countries Brazil, Russia, India and China were down 2 per cent (up 1 per cent, adjusting for currency).

Services

Global Services segment revenues decreased 1 per cent (down 1 per cent, adjusting for currency) to $US13.9 billion. Revenues increased 1 per cent adjusting for the impact of the divested customer care outsourcing business. Global Technology Services segment revenues decreased 1 per cent (down 1 per cent, adjusting for currency) to $US9.4 billion. Adjusting for the impact of the divested customer care outsourcing business, revenues were up 2 per cent (up 2 per cent adjusting for currency). Global Business Services segment revenues were down 2 per cent (down 2 per cent, adjusting for currency) to $US4.5 billion.

Pre-tax income from Global Technology Services increased 22 per cent and pre-tax margin increased to 19.2 per cent, including the impact of a $US0.4 billion workforce rebalancing charge in the prior year. Global Business Services pre-tax income increased 34 per cent and pre-tax margin increased to 17.8 per cent, including the impact of a $US0.2 billion workforce rebalancing charge in the prior year.

The estimated services backlog at June 30 was $US136 billion, down 1 per cent adjusting for the divested customer care outsourcing business (down 3 per cent adjusting for currency).

Software

Revenues from the Software segment were $US6.5 billion, up 1 per cent (flat adjusting for currency) compared with the second quarter of 2013. Software pre-tax income increased 10 per cent and pre-tax margin increased to 36.5 per cent, including the impact of a $US0.2 billion workforce rebalancing charge in the prior year.

Revenues from IBMs key middleware products, which include WebSphere, Information Management, Tivoli, Workforce Solutions and Rational products, were $US4.3 billion, up 1 per cent (flat adjusting for currency) versus the second quarter of 2013. Operating systems revenues of $US530 million were down 13 per cent (down 13 per cent, adjusting for currency) compared with the prior-year quarter.

Financing

Global Financing segment revenues increased 4 per cent (up 4 per cent, adjusting for currency) in the second quarter at $US504 million. Pre-tax income for the segment increased 8 per cent to $US593 million.

Hardware

Revenues from the Systems and Technology segment totaled $US3.3 billion for the quarter, down 11 per cent (down 12 per cent, adjusting for currency) from the second quarter of 2013. Systems and Technology segment pre-tax income increased $US0.2 billion, including the impact of a $US0.2 billion workforce rebalancing charge in the prior year.

Total systems revenues decreased 11 per cent (down 11 per cent, adjusting for currency). Revenues from System z mainframe server products, in the seventh quarter since they were announced, decreased 1 per cent compared with the year-ago period. Total delivery of System z computing power, as measured in MIPS (millions of instructions per second), was flat. Revenues from Power Systems were down 28 per cent compared with the 2013 period. Revenues from System x were down 3 per cent. Revenues from System Storage decreased 12 per cent and within this business area, flash storage grew more than 100 per cent. Revenues from Microelectronics OEM decreased 18 per cent.

Gross Profit

The companys total gross profit margin was 49.1 per cent in the 2014 second quarter compared with 48.7 per cent in the 2013 second-quarter period. Total operating (non-GAAP) gross profit margin was 49.8 per cent in the 2014 second quarter compared with 49.7 per cent in the 2013 second-quarter period, with increases in Global Technology Services and Global Financing.

Expense

Total expense and other income decreased to $US6.8 billion or 15 per cent, including a gain of $US121 million from the divestiture of the customer care outsourcing business and the impact of a $US1.0 billion workforce rebalancing charge in the prior year period. S,G&A expense of $US5.6 billion decreased 16 per cent year over year. R,D&E expense of $US1.5 billion decreased 6 per cent compared with the year-ago period, and was 6 per cent of revenue, consistent with the second-quarter of 2013. Intellectual property and custom development income decreased to $US191 million compared with $US247 million a year ago. Other (income) and expense was income of $US201 million compared with prior-year income of $US91 million. Interest expense increased to $US136 million compared with $US98 million in the prior year.

Total operating (non-GAAP) expense and other income decreased 14 per cent to $US6.7 billion compared with the prior-year period, including the impact of a $US1.0 billion workforce rebalancing charge in the prior year period. Operating (non-GAAP) S,G&A expense decreased 16 per cent to $US5.5 billion compared with the prior-year period. Operating (non-GAAP) R,D&E expense of $US1.5 billion was down 4 per cent compared with the year-ago period.

Pre-Tax Income

Pre-tax income increased 25 per cent to $US5.2 billion and pre-tax margin of 21.2 per cent was up 4.6 points compared with the prior-year period. Operating (non-GAAP) pre-tax income increased 18 per cent to $US5.4 billion and pre-tax margin was 22.3 per cent, up 3.9 points.

***

IBMs tax rate was 20.0 per cent, down 2.1 points year over year; operating (non-GAAP) tax rate was 20.0 per cent, down 2.0 points compared to the year-ago period.

Net income margin increased 4.0 points to 17.0 per cent. Total operating (non-GAAP) net income margin increased 3.5 points to 17.8 per cent.

The weighted-average number of diluted common shares outstanding in the second-quarter 2014 was 1.01 billion compared with 1.11 billion shares in the same period of 2013. As of June 30, 2014, there were 998 million basic common shares outstanding.

Debt, including Global Financing, totaled $US46.5 billion, compared with $US39.7 billion at year-end 2013. From a management segment view, Global Financing debt totaled $US29.4 billion versus $US27.5 billion at year-end 2013, resulting in a debt-to-equity ratio of 7.1 to 1. Non-global financing debt totaled $US17.1 billion, an increase of $US4.9 billion since year-end 2013, resulting in a debt-to-capitalisation ratio of 56.1, essentially flat quarter-to-quarter and higher than the ratio at year-end 2013.

IBM ended the second-quarter 2014 with $US9.7 billion of cash on hand and generated free cash flow of $US3.0 billion, excluding Global Financing receivables, up $US0.3 billion year over year. The company returned $US4.8 billion to shareholders through $US1.1 billion in dividends and $US3.7 billion of gross share repurchases.

Year-To-Date 2014 Results

Net income for the six months ended June 30, 2014 was $US6.5 billion compared with $US6.3 billion in the year-ago period, an increase of 4 per cent. Diluted earnings per share were $US6.37 compared with $US5.60 per diluted share for the 2013 period, an increase of 14 per cent. Revenues for the six-month period totaled $US46.8 billion, a decrease of 3 per cent (down 2 per cent, adjusting for currency) compared with $US48.3 billion for the first six months of 2013.

Operating (non-GAAP) net income for the six months ended June 30, 2014 was $US7.0 billion, flat year to year. Operating (non-GAAP) diluted earnings per share were $US6.82 compared with $US6.23 per diluted share for the 2013 period, an increase of 9.5 per cent.

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