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IBM Reports Earnings: It's A Miss On Revenue But A Beat On Profits

ginni rometty
ginni rometty

REUTERS/Albert Gea IBM Chairwoman and CEO Virginia "Ginni" Rometty

IBM just reported earnings and we're sifting through them now.

IBM reported $24.1 billion in revenue down 12 percent.

That's a miss.

Analysts were looking for $24.77 billion in revenue, expecting them to be down almost 11% from the year-ago quarter.

IBM reported $5.81 earnings per share. That's a beat.

Analysts were looking for adjusted earnings of $5.41 per share.

This is IBM's 11th straight quarter without a year-over-year revenue increase but the stock is up slightly in after-hours trading. But the good news is that, when adjusting for the impact of the some of the businesses IBM recently sold, it's customer care outsourcing unit and its commodity systems businesses, revenue was down only 2 percent.

For the year, IBM reported $92.8 billion in revenue (that's a miss) and $16.53 adjusted EPS (that's a beat).

Analysts expected $16.13 adjusted EPS and $93.55 billion in revenue, down about 6%, according to analysts polled by Yahoo Finance.

Some of that revenue decrease is on purpose. IBM has been selling its underperforming, less profitable units like its commodity servers (sold to Lenovo Group) and its semiconductor manufacturing operations (sold to Globalfoundries).

It's been shifting investment into growth areas like cloud computing, big data, and mobile apps (via an agreement with Apple).

This is its fourth quarter earnings, the first one since CEO Ginni Rometty admitted she would not be keeping the promise made by her predecessor to return $20 earnings per share profit by 2015.

But, since abandoning the $20 EPS profit, called "Roadmap 2015," CEO Ginny Rometty has not yet offered guidance on what the new profit plan or roadmap will be.

Reports are circulating that she is overseeing a huge reorganization of the company — one of the biggest re-orgs the company has ever faced, sources told Paul Kunert at the Channel Register.

Instead of separate hardware and software groups, a structure that's been in place for eons, she's reportedly creating new groups built around new business areas: Research, Sales & Delivery; Systems; Cloud; Watson; Security; Commerce and Analytics. The company will continue to operate its Global Technology Services unit.

Such a big reorg could also mean layoffs, which aren't new to IBM. It's a huge company that had over 400,000 employees worldwide in 2013 and it spent about $1 billion per year in both 2013 and 2014 on layoffs.

Then again, it's also been hiring like mad in its growth areas, and is retraining some of its employees instead of laying them off.

Things have been so rocky for IBM since October, its last earnings announcement, that when 2014 drew to a close, Big Blue was one of the worst performing stocks in the Dow Jones Industrial Average for two years running. Rivals Oracle and Microsoft are currently both more valuable than IBM, by market cap (IBM: $155.3 billion; Oracle: $191.3 billion; Microsoft: $377 billion).

So, when IBM announces earnings, investors will be expecting to hear more about Rometty's new profit targets and this reorg.

Fourth-Quarter 2014:

  • Diluted EPS from continuing operations:

    • GAAP: $5.54, down 4 percent;

    • Operating (non-GAAP): $5.81, down 6 percent;

  • Pre-tax income from continuing operations:

    • GAAP: $7.1 billion, flat year-to-year;

    • Operating (non-GAAP): $7.4 billion, down 2 percent;

  • Net income from continuing operations:

    • GAAP: $5.5 billion, down 11 percent;

    • Operating (non-GAAP): $5.8 billion, down 13 percent;

  • Gross profit margin from continuing operations:

    • GAAP: 53.3 percent, up 100 basis points;

    • Operating (non-GAAP): 53.9 percent, up 60 basis points;

  • Revenue from continuing operations: $24.1 billion:

    • Down 12 percent; down 2 percent adjusting for divested businesses and currency.

Full-Year 2014:

  • Diluted EPS from continuing operations:

    • GAAP: $15.59, up 2 percent;

    • Operating (non-GAAP): $16.53, down 1 percent;

  • Pre-tax income from continuing operations:

    • GAAP: $20.0 billion, down 1 percent;

    • Operating (non-GAAP): $21.1 billion, down 4 percent;

  • Net income from continuing operations:

    • GAAP: $15.8 billion, down 7 percent;

    • Operating (non-GAAP): $16.7 billion, down 9 percent;

  • Gross profit margin from continuing operations:

    • GAAP: 50.0 percent, up 50 basis points;

    • Operating (non-GAAP): 50.6 percent, up 10 basis points;

  • Revenue from continuing operations: $92.8 billion:

    • Down 6 percent; down 1 percent adjusting for divested businesses and currency;

  • Strategic imperatives grew 16 percent to $25 billion, and now represent 27 percent of total IBM revenue:

    • Total Cloud revenue of $7 billion, up 60 percent;

      • Cloud delivered as a service revenues of $3 billion, up approximately 75 percent;

      • Year-end annual run rate of $3.5 billion for cloud delivered as a service;

    • Business analytics revenue up 7 percent to nearly $17 billion;

    • Mobile revenue more than tripled;

    • Security revenue up 19 percent.

IBM (IBM) today announced fourth-quarter 2014 diluted earnings from continuing operations of $5.54 per share, compared with diluted earnings of $5.76 per share in the fourth-quarter of 2013, a decrease of 4 percent. Operating (non-GAAP) diluted earnings from continuing operations were $5.81 per share compared with operating diluted earnings of $6.16 per share in the fourth-quarter of 2013, a decrease of 6 percent.

Fourth-quarter net income from continuing operations was $5.5 billion compared with $6.2 billion in the fourth-quarter of 2013, a decrease of 11 percent. Operating (non-GAAP) net income from continuing operations was $5.8 billion, as compared with $6.6 billion in the fourth-quarter of 2013, a decrease of 13 percent.

For the fourth-quarter of 2014, IBM reported consolidated net income of $5.5 billion or $5.51 of diluted earnings per share, including operating net losses in discontinued operations related to the microelectronics manufacturing business.

Total revenues from continuing operations for the fourth-quarter of 2014 of $24.1 billion were down 12 percent (down 2 percent, adjusting for the impact of the divested customer care outsourcing and System x businesses and for currency) from the fourth-quarter of 2013 and were down 1 percent for the full year 2014, adjusting for the impact of the divested businesses and for currency.

“We are making significant progress in our transformation, continuing to shift IBM’s business to higher value, and investing and positioning ourselves for the longer term," said Ginni Rometty, IBM chairman, president and chief executive officer.

"In 2014, we repositioned our hardware portfolio for higher value, maintained a services backlog of $128 billion and achieved strong revenue growth across cloud, analytics, mobile, social and security. Together these strategic imperatives grew 16 percent in 2014 and now represent $25 billion and 27 percent of our revenue.”

Fourth-Quarter GAAP – Operating (non-GAAP) Reconciliation

Fourth-quarter operating (non-GAAP) diluted earnings from continuing operations exclude $0.27 per share of charges; $0.19 per share for the amortization of purchased intangible assets and other acquisition-related charges; and $0.08 per share for retirement-related charges driven by changes to plan assets and liabilities primarily related to market performance.

Full-Year 2015 Expectations

The company will provide 2015 earnings expectations during today’s quarterly earnings conference call.

Geographic Regions

The Americas’ fourth-quarter revenues were $11.1 billion, a decrease of 9 percent (down 4 percent, adjusting for divested businesses and currency) from the 2013 period. Revenues from Europe/Middle East/Africa were down 13 percent to $8.0 billion (down 1 percent, adjusting for divested businesses and currency). Asia-Pacific revenues decreased 17 percent (down 2 percent, adjusting for divested businesses and currency) to $4.9 billion.

Growth Markets and Major Markets

Revenues from the company’s growth markets were down 16 percent (down 2 percent, adjusting for divested businesses and currency). Revenues in the BRIC countries — Brazil, Russia, India and China — were down 21 percent (down 8 percent, adjusting for divested businesses and currency). China revenues were down 1 percent, adjusting for divested businesses and currency. Revenues from the company’s major markets were down 11 percent (down 2 percent, adjusting for divested businesses and currency).

Services

Global Services segment revenues decreased 8 percent (flat adjusting for the impact of the divested customer care outsourcing and System x businesses and for currency) to $13.5 billion. Global Technology Services segment revenues decreased 8 percent (up 2 percent adjusting for the impact of the divested customer care outsourcing and System x businesses and for currency) to $9.2 billion. Global Business Services segment revenues were down 8 percent (down 3 percent, adjusting for currency) to $4.3 billion.

Pre-tax income from Global Technology Services decreased 26 percent and pre-tax margin decreased to 15.6 percent. Global Business Services pre-tax income decreased 22 percent and pre-tax margin decreased to 16.4 percent. Pre-tax income and margin include the impact of the fourth-quarter workforce rebalancing charge.

The estimated services backlog at December 31, 2014 was $128 billion, flat year to year adjusting for the divested customer care outsourcing and System x businesses and currency.

Software

Revenues from the Software segment were $7.6 billion, down 7 percent (down 3 percent, adjusting for currency) compared with the fourth-quarter of 2013. Software pre-tax income decreased 11 percent and pre-tax margin decreased to 44.7 percent. Pre-tax income and margin include the impact of the fourth-quarter workforce rebalancing charge.

Revenues from IBM’s key middleware products, which include WebSphere, Information Management, Tivoli, Workforce Solutions and Rational products, were $5.4 billion, down 6 percent (down 3 percent, adjusting for currency) versus the fourth-quarter of 2013. Operating systems revenues of $557 million were down 19 percent (down 16 percent, adjusting for currency) compared with the prior-year quarter.

Financing

Global Financing segment revenues were flat (up 5 percent, adjusting for currency) in the fourth-quarter to $532 million. Pre-tax income for the segment decreased 11 percent to $526 million.

Hardware

Revenues from continuing operations for the Systems and Technology segment totaled $2.4 billion for the quarter, down 39 percent (down 12 percent, adjusting for the impact of the divested System x business and currency) from the fourth-quarter of 2013. Systems and Technology pre-tax income increased 12 percent and pre-tax margin increased to 15.5 percent. Pre-tax income and margin include the impact of the fourth-quarter workforce rebalancing charge.

Revenues from Power Systems were down 13 percent (down 11 percent, adjusting for currency) compared with the 2013 period. Revenues from System z mainframe server products decreased 26 percent (down 23 percent, adjusting for currency). Revenues from System Storage decreased 8 percent (down 5 percent, adjusting for currency).

Gross Profit

The company’s total gross profit margin from continuing operations was 53.3 percent in the 2014 fourth-quarter period compared with 52.4 percent in the 2013 fourth-quarter period. Total operating (non-GAAP) gross profit margin from continuing operations was 53.9 percent in the 2014 fourth-quarter compared with 53.3 percent in the 2013 fourth-quarter period.

Expense

Total reported expense and other income from continuing operations declined 20 percent to $5.8 billion compared with the prior year period. The reported reduction was driven by the gain of $1.4 billion ($1.1 billion pre-tax income benefit, net of related transaction and performance-based costs) from the divestiture of the System x business and the elimination of the expense for the System x business from the company’s run rate. Without these items, expense and other income would have been up approximately 2 percent. S,G&A expense of $6.0 billion was up 1 percent from the prior-year period and includes the workforce rebalancing charge of approximately $580 million. R,D&E expense of $1.3 billion decreased 9 percent compared with the year-ago period, reflecting the divestiture of the System x business and currency impact. Intellectual property and custom development income decreased to $199 million compared with $201 million a year ago. Other (income) and expense was income of $1.5 billion, including the gain from the divested System x business, compared with prior-year income of $116 million. Interest expense increased to $117 million compared with $113 million in the prior-year period.

Total operating (non-GAAP) expense and other income from continuing operations decreased 20 percent to $5.6 billion compared with the prior-year period, including the gain from the divestiture of the System x business. Operating (non-GAAP) S,G&A expense increased 1 percent to $5.8 billion compared with the prior-year period and includes the workforce rebalancing charge. Operating (non-GAAP) R,D&E expense of $1.3 billion was down 7 percent compared with the year-ago period, reflecting the divestiture of the System x business and currency impact.

Pre-Tax Income

Pre-tax income from continuing operations was flat year over year at $7.1 billion; pre-tax margin of 29.4 percent was up 3.5 points compared with the prior-year period. Operating (non-GAAP) pre-tax income from continuing operations decreased 2 percent to $7.4 billion and pre-tax margin was 30.7 percent, up 3.0 points, compared to the year-ago period.

***

IBM’s tax rate from continuing operations was 22.3 percent, up 9.8 points year over year; operating (non-GAAP) tax rate was 21.8 percent, up 9.6 points compared to the year-ago period. The change in the fourth-quarter tax rate is driven by prior year discrete tax items, including benefits from tax audit settlements.

Net income margin from continuing operations increased 0.2 points to 22.9 percent. Total operating (non-GAAP) net income margin from continuing operations decreased 0.3 points to 24.0 percent.

The weighted-average number of diluted common shares outstanding in the fourth-quarter 2014 was 995 million, a decrease of 8 percent compared with the same period of 2013. As of December 31, 2014, there were 991 million basic common shares outstanding.

Debt, including Global Financing, totaled $40.8 billion, compared with $39.7 billion at year-end 2013, and down $4.9 billion from the third quarter of 2014. From a management segment view, Global Financing debt totaled $29.1 billion versus $27.5 billion at year-end 2013, resulting in a debt-to-equity ratio of 7.2 to 1. Core (non-global financing) debt totaled $11.7 billion, a decrease of $0.5 billion since year-end 2013, resulting in a debt-to-capitalization ratio of 59 percent, which includes impacts from retirement plan remeasurement that take into account changes in discount rates and recently released U.S. mortality tables, the announced Microelectronics business divestiture and foreign exchange translation.

IBM ended the fourth-quarter 2014 with $8.5 billion of cash on hand and generated free cash flow of $6.6 billion, excluding Global Financing receivables, down approximately $1.8 billion year over year. In the fourth quarter of 2014, the company returned $1.2 billion to shareholders through $1.1 billion in dividends and $0.1 billion of gross share repurchases.

At the end of December 2014, IBM had approximately $6.3 billion remaining from the current share repurchase authorization.

Full-Year 2014 Results

Net income from continuing operations for the twelve months ended December 31, 2014 was $15.8 billion compared with $16.9 billion in the year-ago period, a decrease of 7 percent. Diluted earnings per share from continuing operations were $15.59, up 2 percent compared to the 2013 period.

The consolidated diluted earnings per share were $11.90 as compared to $14.94 per share in 2013, down 20 percent. Revenues from continuing operations for the twelve-month period totaled $92.8 billion, a decrease of 6 percent (down 1 percent, adjusting for divested businesses and currency) compared with $98.4 billion for the twelve months of 2013.

Full year results include a non-recurring pre-tax charge of $4.7 billion, or $3.4 billion, net of tax. The charge includes an impairment to reflect fair value less estimated costs to sell the Microelectronics manufacturing business assets, which the company has classified as held for sale at December 31, 2014. The charge also includes other estimated costs related to the transaction, including cash consideration expected to be transferred to GLOBALFOUNDRIES of approximately $1.5 billion.

Operating (non-GAAP) net income from continuing operations for the twelve months ended December 31, 2014 was $16.7 billion compared with $18.4 billion in the year-ago period, a decrease of 9 percent. Operating (non-GAAP) diluted earnings per share from continuing operations were $16.53 compared with $16.64 per diluted share for the 2013 period, a decrease of less than 1 percent.



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