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Source: IBM

Highlights
Third Quarter:
GAAP EPS from continuing operations of $1.87
Operating (non-GAAP) EPS of $2.68
Net cash from operating activities of $15.4 billion and free cash flow of $12.3 billion, over the last 12 months
Debt reduced by $6.7 billion since the end of second quarter
Revenue of $18.0 billion, down 3.9 percent (down 0.6 percent adjusting for divested businesses and currency)
Revenue for Red Hat, up 19 percent (up 20 percent adjusting for currency), normalized for historical comparability
Revenue growth in Cloud & Cognitive Software and Global Business Services segments– Cloud & Cognitive Software up 6 percent (up 8 percent adjusting for currency)–   Global Business Services up 1 percent (up 2 percent adjusting for currency)
Cloud revenue of $5.0 billion in the third quarter, up 11 percent (up 14 percent adjusting for divested businesses and currency)–   Cloud revenue of $20.0 billion over the last 12 months
2019 Full-year Expectations:
GAAP EPS of at least $10.58; maintains operating (non-GAAP) EPS of at least $12.80
Maintains free cash flow of approximately $12 billion 
ARMONK, N.Y., October 16, 2019 . . . IBM (NYSE: IBM) today announced third-quarter results.
“In the third quarter, as we continued to help clients with their digital reinventions, we grew revenue in our Cloud & Cognitive Software segment and in Global Business Services,” said Ginni Rometty, IBM chairman, president and chief executive officer.  “Our results demonstrate that clients see IBM and Red Hat as a powerful combination and they trust us to provide them with the open hybrid cloud technology, innovation and industry expertise to help them shift their mission-critical workloads to the cloud.”

THIRD QUARTER 2019Results Reflect the Impact of Items Related tothe Red Hat Acquisition Closed in July 2019

Diluted EPS

NetIncome

Pre-taxIncome

Pre-taxIncomeMargin

GrossProfitMargin

GAAP from Continuing Operations

 $1.87

$1.7B

$1.5B

8.4%

46.2%

Year/Year

 (36)%

(38)%

(49)%

(7.5)Pts

(0.7)Pts

Operating (Non-GAAP)

$2.68
 

$2.4B

$2.4B

13.3%

47.4%

Year/Year

(22)%

(24)%

(33)%

(5.9)Pts

(0.0)Pts

“We continued our focus on the strength of our balance sheet in the third quarter,” said James Kavanaugh, IBM senior vice president and chief financial officer.  “We generated $12.3 billion in free cash flow over the last 12 months and with our disciplined financial management we reduced debt by nearly $7 billion in the quarter, while maintaining a strong cash balance.”
Cash Flow and Balance Sheet
In the third quarter, the company generated net cash from operating activities of $3.6 billion, or $2.5 billion excluding Global Financing receivables.  IBM’s free cash flow was $1.8 billion.  IBM returned $1.6 billion to shareholders through $1.4 billion in dividends and $0.1 billion in gross share repurchases.  The company suspended its share repurchase program on July 9.
IBM ended the third quarter with $11.0 billion of cash on hand.  Debt, including Global Financing debt of $23.1 billion, totaled $66.3 billion – down $6.7 billion since the end of the second quarter.
Segment Results for Third Quarter
Cloud & Cognitive Software (includes cloud and data platforms which includes Red Hat; cognitive applications; and transaction processing platforms) — revenues of $5.3 billion, up 6.4 percent (up 7.8 percent adjusting for currency), led by security, IoT, data and AI platforms and hybrid cloud; cloud and data platforms, up 17 percent (up 19 percent adjusting for currency); cognitive applications, up 4 percent (up 6 percent adjusting for currency); transaction processing platforms, down 5 percent (down 4 percent adjusting for currency).
Global Business Services (includes consulting, application management and global process services) — revenues of $4.1 billion, up 1.0 percent (up 2.2 percent adjusting for currency), led by growth in consulting, up 4 percent (up 5 percent adjusting for currency); gross profit margin increased 110 basis points.
Global Technology Services (includes infrastructure and cloud services and technology support services) — revenues of $6.7 billion, down 5.6 percent (down 4.1 percent adjusting for currency).
Systems (includes systems hardware and operating systems software) — revenues of $1.5 billion, down 14.7 percent (down 13.8 percent adjusting for currency), reflecting the end of the IBM z14 product cycle and shipping of the new IBM z15 in the last week of September; gross profit margin expansion in Power and Storage.
Global Financing (includes financing and used equipment sales) — revenues of $343 million, down 11.7 percent (down 10.7 percent adjusting for currency); revenue reflects the wind-down of OEM commercial financing; gross profit margin expansion.
Full-Year 2019 Expectations
On August 2, 2019, the company updated full-year expectations to reflect the impact of the Red Hat acquisition and related activities.  IBM expects GAAP diluted earnings per share for the full year to be at least $10.58.  The company continues to expect operating (non-GAAP) diluted earnings per share of at least $12.80.  Operating (non-GAAP) diluted earnings per share exclude $2.22 per share of charges for: amortization of purchased intangible assets and other acquisition-related charges, including pre-closing charges, such as financing costs, associated with the Red Hat acquisition; retirement-related charges; and tax reform enactment impacts.
 IBM continues to expect free cash flow of approximately $12 billion, with a realization rate over 100 percent of GAAP Net Income.
Year-To-Date 2019 Results
Year-to-date results reflect the impact of items related to the Red Hat acquisition closed in July 2019.  Consolidated diluted earnings per share was $6.45 compared to $7.37, down 12 percent year to year.  Consolidated net income was $5.8 billion, down 15 percent year to year.  Revenues for the nine-month period ended September 30, 2019 totaled $55.4 billion, a decrease of 4 percent year to year (down 0.7 percent adjusting for divested businesses and currency) compared with $57.8 billion for the first nine months of 2018.
Operating (non-GAAP) diluted earnings per share from continuing operations was $8.10 compared with $8.96 per diluted share for the 2018 period, a decrease of 10 percent.  Operating (non-GAAP) net income for the nine months ended September 30, 2019 was $7.2 billion compared with $8.2 billion in the prior-year period, a decrease of 12 percent.
Forward-Looking and Cautionary Statements
Except for the historical information and discussions contained herein, statements contained in this release may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based on the company’s current assumptions regarding future business and financial performance.  These statements involve a number of risks, uncertainties and other factors that could cause actual results to differ materially, including, but not limited to, the following: a downturn in economic environment and client spending budgets; the company’s failure to meet growth and productivity objectives; a failure of the company’s innovation initiatives; damage to the company’s reputation; risks from investing in growth opportunities; failure of the company’s intellectual property portfolio to prevent competitive offerings and the failure of the company to obtain necessary licenses; cybersecurity and data privacy considerations; fluctuations in financial results, impact of local legal, economic, political and health conditions; adverse effects from environmental matters, tax matters and the company’s pension plans; ineffective internal controls; the company’s use of accounting estimates; the company’s ability to attract and retain key employees and its reliance on critical skills; impacts of relationships with critical suppliers; product quality issues; impacts of business with government clients; currency fluctuations and customer financing risks; impact of changes in market liquidity conditions and customer credit risk on receivables; reliance on third party distribution channels and ecosystems; the company’s ability to successfully manage acquisitions, alliances and dispositions, including integration challenges, failure to achieve objectives, the assumption of liabilities, and higher debt levels; legal proceedings and investigatory risks; risk factors related to IBM securities; and other risks, uncertainties and factors discussed in the company’s Form 10‑Qs, Form 10‑K and in the company’s other filings with the U.S. Securities and Exchange Commission (SEC) or in materials incorporated therein by reference. Any forward-looking statement in this release speaks only as of the date on which it is made. Except as required by law, the company assumes no obligation to update or revise any forward-looking statements.
Presentation of Information in this Press Release
In an effort to provide investors with additional information regarding the company’s results as determined by generally accepted accounting principles (GAAP), the company has also disclosed in this press release the following non-GAAP information, which management believes provides useful information to investors:
IBM results —
adjusting for currency (i.e., at constant currency);
total revenue and cloud revenue adjusting for divested businesses and currency;
revenue for Red Hat normalized for historical comparability;
presenting operating (non-GAAP) earnings per share amounts and related income statement items;
adjusting for free cash flow;
net cash from operating activities, excluding Global Financing receivables.
Free cash flow guidance is derived using an estimate of profit, working capital and operational cash outflows.  The company views Global Financing receivables as a profit-generating investment, which it seeks to maximize and therefore it is not considered when formulating guidance for free cash flow.  As a result, the company does not estimate a GAAP Net Cash from Operations expectation metric.
The rationale for management’s use of these non-GAAP measures is included in Exhibit 99.2 in the Form 8‑K that includes this press release and is being submitted today to the SEC.
Conference Call and Webcast
IBM’s regular quarterly earnings conference call is scheduled to begin at 5:00 p.m. EDT, today. The Webcast may be accessed via a link at http://www.ibm.com/investor/events/earnings/3q19.html. Presentation charts will be available shortly before the Webcast.
Financial Results Below (certain amounts may not add due to use of rounded numbers; percentages presented are calculated from the underlying whole-dollar amounts).
Contact(s):
IBMEdward Barbini1 (914) 499-6565barbini@us.ibm.com
John Bukovinsky1 (732) 618‑3531jbuko@us.ibm.com

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