IBM Reports 2012 First-Quarter Results

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

• Diluted EPS:
  • GAAP: $2.61, up 13 percent;
  • Operating (non-GAAP): $2.78, up 15 percent;
• Net income:
  • GAAP: $3.1 billion, up 7 percent;
  • Operating (non-GAAP): $3.3 billion, up 9 percent;

• Gross profit margin:
  • GAAP: 45.1 percent, up 0.9 points;
  • Operating (non-GAAP): 45.7 percent, up 1.2 points;

• Revenue: $24.7 billion, flat, up 1 percent adjusting for currency;
• Free cash flow of $1.9 billion, up $1.1 billion;
• Software revenue up 5 percent, 7 percent adjusting for currency;
• Services revenue up 1 percent:
  • Services pre-tax income up 11 percent;
• Services backlog of $139 billion, down 2 percent, up 1 percent adjusting for currency;
• Systems and Technology revenue down 7 percent, 6 percent adjusting for currency;
• Growth markets revenue up 9 percent;
• Business analytics revenue up 14 percent;
• Smarter Planet revenue up more than 25 percent;
• Cloud revenue doubled first-quarter 2011 revenue;
• Full-year 2012 operating (non-GAAP) EPS expectations raised to at least $15.00 from at least $14.85.

IBM (NYSE: IBM) today announced first-quarter 2012 diluted earnings of $2.61 per share, compared with diluted earnings of $2.31 per share in the first quarter of 2011, an increase of 13 percent. Operating (non-GAAP) diluted earnings were $2.78 per share, compared with operating diluted earnings of $2.41 per share in the first quarter of 2011, an increase of 15 percent.

First-quarter net income was $3.1 billion compared with $2.9 billion in the first quarter of 2011, an increase of 7 percent. Operating (non-GAAP) net income was $3.3 billion compared with $3.0 billion in the first quarter of 2011, an increase of 9 percent.

Total revenues for the first quarter of 2012 of $24.7 billion were flat (up 1 percent, adjusting for currency) from the first quarter of 2011.

“In the first quarter, we drove strong profit and earnings per share growth. We delivered another excellent software performance, expanded services margins, and continued the momentum in our growth initiatives,” said Ginni Rometty, IBM president and chief executive officer. “Our investments in growth market countries continued to generate strong revenue growth across software, hardware and services while contributing to the company’s ongoing margin expansion.

“Based on this performance, we are raising our 2012 full-year operating earnings per share expectations to at least $15.00.”

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

First-quarter operating (non-GAAP) diluted earnings exclude $0.17 per share of charges: $0.11 per share for the amortization of purchased intangible assets and other acquisition-related charges, and $0.06 per share for retirement-related charges driven by changes to plan assets and liabilities primarily related to market performance.

Full-Year 2012 Expectations

IBM raised its expectations for full-year 2012 GAAP diluted earnings per share to at least $14.27 from at least $14.16; and operating (non-GAAP) diluted earnings per share to at least $15.00 from at least $14.85. The 2012 operating (non-GAAP) earnings expectations exclude $0.73 per share of charges for amortization of purchased intangible assets, other acquisition-related charges, and retirement-related charges driven by changes to plan assets and liabilities primarily related to market performance.

Geographic Regions

The Americas’ first-quarter revenues were $10.5 billion, an increase of 1 percent (up 2 percent, adjusting for currency) from the 2011 period. Revenues from Europe/Middle East/Africa were $7.6 billion, down 2 percent (up 1 percent, adjusting for currency). Asia-Pacific revenues increased 4 percent (up 1 percent, adjusting for currency) to $6.1 billion. OEM revenues were $509 million, down 17 percent compared with the 2011 first quarter.

Growth Markets

Revenues from the company’s growth markets increased 9 percent (up 9 percent, adjusting for currency) and 40 countries had double digit revenue growth at constant currency. Revenues in the BRIC countries — Brazil, Russia, India and China — increased 10 percent (up 11 percent, adjusting for currency).

Services

Global Technology Services segment revenues increased 2 percent (up 3 percent, adjusting for currency) to $10.0 billion. Global Business Services segment revenues were down 2 percent (down 1 percent, adjusting for currency) to $4.6 billion.

Pre-tax income from Global Technology Services increased 20 percent and pre-tax margin increased to 14.3 percent. Global Business Services pre-tax income decreased 6 percent and pre-tax margin decreased to 12.5 percent.

The estimated services backlog at March 31 was $139 billion, down 2 percent year over year at actual rates (up 1 percent, adjusting for currency). Services backlog at the end of a quarter measures the current value of work under contract expected to be recognized as revenue in future quarters.

Software

Revenues from the Software segment were $5.6 billion, an increase of 5 percent (up 7 percent, adjusting for currency) compared with the first quarter of 2011. Software pre-tax income increased 12 percent and pre-tax margin increased to 30.2 percent.

Revenues from IBM’s key middleware products, which include WebSphere, Information Management, Tivoli, Lotus and Rational products, were $3.5 billion, an increase of 7 percent (up 8 percent, adjusting for currency) versus the first quarter of 2011. Operating systems revenues of $590 million increased 9 percent (up 10 percent, adjusting for currency) compared with the prior-year quarter.

Revenues from the WebSphere family of software products increased 16 percent year over year. Information Management software revenues increased 5 percent. Revenues from Tivoli software increased 5 percent. Revenues from Lotus software were flat, and Rational software increased 1 percent.

Revenues from the company’s business analytics operations across services, software and hardware segments increased 14 percent.

Hardware

Revenues from the Systems and Technology segment totaled $3.7 billion for the quarter, down 7 percent (down 6 percent, adjusting for currency) from the first quarter of 2011. Systems and Technology pre-tax income decreased $236 million.

Total systems revenues decreased 6 percent (down 6 percent, adjusting for currency). Revenues from Power Systems were flat compared with the 2011 period. Revenues from System x were also flat. Revenues from System z mainframe server products decreased 25 percent compared with the year-ago period. Total delivery of System z computing power, as measured in MIPS (millions of instructions per second), decreased 5 percent. Revenues from System Storage decreased 4 percent, and revenues from Retail Store Solutions decreased 13 percent year over year. Revenues from Microelectronics OEM decreased 13 percent.

Financing

Global Financing segment revenues decreased 5 percent (down 4 percent, adjusting for currency) in the first quarter to $490 million. Pre-tax income for the segment decreased 1 percent to $512 million.

***

The company’s total gross profit margin was 45.1 percent in the 2012 first quarter compared with 44.1 percent in the 2011 first-quarter period. Total operating (non-GAAP) gross profit margin was 45.7 percent in the 2012 first quarter compared with 44.5 percent in the 2011 first-quarter period, with increases in Global Technology Services and Global Business Services.

Total expense and other income increased 3 percent to $7.3 billion compared with the prior-year period. S,G&A expense of $5.9 billion increased 1 percent year over year. R,D&E expense of $1.6 billion increased 1 percent compared with the year-ago period. Intellectual property and custom development income decreased to $255 million compared with $262 million a year ago. Other (income) and expense was income of $58 million compared with prior-year income of $202 million. Interest expense increased to $110 million compared with $93 million in the prior year.

Total operating (non-GAAP) expense and other income increased 3 percent to $7.2 billion compared with the prior-year period. Operating (non-GAAP) S,G&A expense of $5.8 billion was flat compared with prior-year expense. Operating (non-GAAP) R,D&E expense of $1.6 billion was flat compared with the year-ago period.

Pre-tax income of $3.8 billion and pre-tax margin of 15.5 percent were flat compared with the prior-year period. Operating (non-GAAP) pre-tax income increased 3 percent to $4.1 billion and pre-tax margin was 16.7 percent, up 0.5 points.

IBM’s tax rate was 20.1 percent, down 4.9 points year over year; operating (non-GAAP) tax rate was 20.6 percent, down 4.4 points. The lower tax rate was due to a one-time benefit associated with a tax restructuring in Latin America. The benefit offset the company’s first-quarter workforce rebalancing expense, similar to first-quarter 2011 when a one-time gain from asset sales offset workforce rebalancing expenses. The company expects its full-year 2012 effective tax rate on a GAAP and operating (non-GAAP) basis to be in the range of 24 percent; and excluding the one-time benefit in the first quarter, the rate is expected to be in the range of 25 percent.

Net income margin increased 0.8 points to 12.4 percent. Total operating (non-GAAP) net income margin increased 1.1 points to 13.2 percent.

The weighted-average number of diluted common shares outstanding in the first-quarter 2012 was 1.17 billion compared with 1.24 billion shares in the same period of 2011. As of March 31, 2012, there were 1.15 billion basic common shares outstanding.

Debt, including Global Financing, totaled $32.1 billion, compared with $31.3 billion at year-end 2011. From a management segment view, Global Financing debt totaled $23.6 billion versus $23.3 billion at year-end 2011, resulting in a debt-to-equity ratio of 7.0 to 1. Non-global financing debt totaled $8.5 billion, an increase of $469 million since year-end 2011, resulting in a debt-to-capitalization ratio of 32.7 percent from 32.0 percent.

IBM ended the first-quarter 2012 with $12.3 billion of cash on hand and generated free cash flow of $1.9 billion, excluding Global Financing receivables, up approximately $1.1 billion year over year. The company returned $3.9 billion to shareholders through $0.9 billion in dividends and $3.0 billion of share repurchases. The balance sheet remains strong, and the company is well positioned to support the business over the long term.

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 the following: a downturn in economic environment and corporate IT spending budgets; the company’s failure to meet growth and productivity objectives, a failure of the company’s innovation initiatives; 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 and purchases, 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 personnel and its reliance on critical skills; impacts of relationships with critical suppliers and 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; the company’s ability to successfully manage acquisitions and alliances; risk factors related to IBM securities; and other risks, uncertainties and factors discussed in the company’s Form 10-Q, 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. 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 and expectations —

• presenting operating (non-GAAP) earnings per share amounts and related income statement items;
• presenting non-global financing debt-to-capitalization ratio;
• adjusting for free cash flow;
• adjusting for currency (i.e., at constant currency);
• adjusting for one-time tax benefit.

The rationale for management’s use of non-GAAP measures is included as part of the supplemental materials presented within the first-quarter earnings materials. These materials are available on the IBM investor relations Web site at www.ibm.com/investor and are being included in Attachment II (“Non-GAAP Supplemental Materials”) to 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 4:30 p.m. EDT, today. Investors may participate by viewing the Webcast at www.ibm.com/investor/1q12. Presentation charts will be available on the Web site 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).

INTERNATIONAL BUSINESS MACHINES CORPORATION
COMPARATIVE FINANCIAL RESULTS
(Unaudited; Dollars in millions except per share amounts)
	Three Months Ended March 31,
							Percent
	2012			2011			Change
REVENUE
Global Technology Services	$	10,035		$	9,863		1.7	%
Gross profit margin		35.3	%		33.8	%
Global Business Services		4,637			4,710		-1.5	%
Gross profit margin		28.0	%		27.4	%
Software		5,600			5,308		5.5	%
Gross profit margin		87.0	%		87.0	%
Systems and Technology		3,749			4,019		-6.7	%
Gross profit margin		34.2	%		37.8	%
Global Financing		490			516		-5.1	%
Gross profit margin		50.7	%		53.5	%
Other		162			190		-14.9	%
Gross profit margin		-74.8	%		-93.3	%
TOTAL REVENUE		24,673			24,607		0.3	%
GROSS PROFIT		11,118			10,858		2.4	%
Gross profit margin		45.1	%		44.1	%
EXPENSE AND OTHER INCOME
S,G&A		5,886			5,826		1.0	%
Expense to revenue		23.9	%		23.7	%
R,D&E		1,601			1,587		0.9	%
Expense to revenue		6.5	%		6.4	%
Intellectual property
and custom development
income		(255	)		(262	)	-2.5	%
Other (income) and expense		(58	)		(202	)	-71.2	%
Interest expense		110			93		17.7	%
TOTAL EXPENSE AND
OTHER INCOME		7,283			7,041		3.4	%
Expense to revenue		29.5	%		28.6	%
INCOME BEFORE
INCOME TAXES		3,836			3,817		0.5	%
Pre-tax margin		15.5	%		15.5	%
Provision for
income taxes		769			954		-19.4	%
Effective tax rate		20.1	%		25.0	%
NET INCOME	$	3,066		$	2,863		7.1	%
Net income margin		12.4	%		11.6	%
EARNINGS PER SHARE
OF COMMON STOCK:
ASSUMING DILUTION	$	2.61		$	2.31		13.0	%
BASIC	$	2.65		$	2.34		13.2	%
WEIGHTED-AVERAGE NUMBER
OF COMMON SHARES
OUTSTANDING (M's):
ASSUMING DILUTION		1,174.2			1,240.0
BASIC		1,159.1			1,222.2

INTERNATIONAL BUSINESS MACHINES CORPORATION
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(Unaudited)
	At			At
(Dollars in Millions)	March 31,			December 31,
	2012			2011
ASSETS
Current Assets:
Cash and cash equivalents	$	11,835		$	11,922
Marketable securities		500			--
Notes and accounts receivable - trade
(net of allowances of $272 in 2012 and $256 in 2011)		10,012			11,179
Short-term financing receivables
(net of allowances of $282 in 2012 and $311 in 2011)		15,160			16,901
Other accounts receivable
(net of allowances of $9 in 2012 and $11 in 2011)		1,669			1,481
Inventories, at lower of average cost or market:
Finished goods		696			589
Work in process and raw materials		2,058			2,007
Total inventories		2,754			2,595
Deferred taxes		1,617			1,601
Prepaid expenses and other current assets		5,299			5,249
Total Current Assets		48,847			50,928
Property, plant and equipment		40,441			40,124
Less: Accumulated depreciation		26,496			26,241
Property, plant and equipment - net		13,946			13,883
Long-term financing receivables
(net of allowances of $58 in 2012 and $38 in 2011)		10,549			10,776
Prepaid pension assets		2,974			2,843
Deferred taxes		3,100			3,503
Goodwill		27,468			26,213
Intangible assets - net		3,641			3,392
Investments and sundry assets		4,822			4,895
Total Assets	$	115,347		$	116,433
LIABILITIES AND EQUITY
Current Liabilities:
Taxes	$	2,184		$	3,313
Short-term debt		6,293			8,463
Accounts payable		7,416			8,517
Compensation and benefits		4,370			5,099
Deferred income		13,269			12,197
Other accrued expenses and liabilities		4,677			4,535
Total Current Liabilities		38,209			42,123
Long-term debt		25,760			22,857
Retirement and nonpension postretirement
benefit obligations		17,579			18,374
Deferred income		3,904			3,847
Other liabilities		9,112			8,996
Total Liabilities		94,563			96,197
Equity:
IBM Stockholders' Equity:
Common stock		48,800			48,129
Retained earnings		107,036			104,857
Treasury stock -- at cost		(114,020	)		(110,963	)
Accumulated other comprehensive income/(loss)		(21,115	)		(21,885	)
Total IBM stockholders' equity		20,701			20,138
Noncontrolling interests		82			97
Total Equity		20,783			20,236
Total Liabilities and Equity	$	115,347		$	116,433

INTERNATIONAL BUSINESS MACHINES CORPORATION
CASH FLOW ANALYSIS
(Unaudited)
(Dollars in Millions)	Three Months Ended
	March 31,
	2012			2011
Net Cash from Operating Activities per GAAP:	$	4,291		$	3,792
Less: the change in Global Financing (GF)
Receivables		1,424			1,936
Net Cash from Operating Activities
(Excluding GF Receivables)		2,867			1,856
Capital Expenditures, Net		(1,002	)		(1,058	)
Free Cash Flow
(Excluding GF Receivables)		1,865			798
Acquisitions		(1,319	)		(51	)
Dividends		(870	)		(795	)
Share Repurchase		(3,015	)		(4,045	)
Non-GF Debt		657			1,027
Other (includes GF Receivables, GF Debt)		3,094			4,660
Change in Cash, Cash Equivalents and
Short-term Marketable Securities	$	413		$	1,594

INTERNATIONAL BUSINESS MACHINES CORPORATION
SEGMENT DATA
(Unaudited)
	FIRST-QUARTER 2012
										Pre-tax
(Dollars in Millions)	Revenue									Income/			Pre-tax
	External			Internal			Total			(Loss)			Margin
SEGMENTS
Global Technology Services	$	10,035		$	293		$	10,328		$	1,480		14.3	%
% change		1.7	%		-4.6	%		1.6	%		19.6	%
Global Business Services		4,637			182			4,820			601		12.5	%
% change		-1.5	%		-8.8	%		-1.8	%		-6.1	%
Software		5,600			840			6,439			1,945		30.2	%
% change		5.5	%		1.2	%		4.9	%		12.1	%
Systems and Technology		3,749			151			3,900			(105	)	-2.7	%
% change		-6.7	%		-38.2	%		-8.5	%		NM
Global Financing		490			485			975			512		52.6	%
% change		-5.1	%		-2.5	%		-3.8	%		-1.3	%
TOTAL REPORTABLE SEGMENTS	$	24,511		$	1,951		$	26,462		$	4,434		16.8	%
% change		0.4	%		-6.1	%		-0.1	%		4.0	%
Eliminations / Other		162			(1,951	)		(1,789	)		(598	)
TOTAL IBM CONSOLIDATED	$	24,673		$	0		$	24,673		$	3,836		15.5	%
% change		0.3	%					0.3	%		0.5	%
NM - Not Meaningful
	FIRST-QUARTER 2011
										Pre-tax
(Dollars in Millions)	Revenue									Income/			Pre-tax
	External			Internal			Total			(Loss)			Margin
SEGMENTS
Global Technology Services	$	9,863		$	307		$	10,170		$	1,238		12.2	%
Global Business Services		4,710			200			4,910			640		13.0	%
Software		5,308			830			6,138			1,735		28.3	%
Systems and Technology		4,019			244			4,263			132		3.1	%
Global Financing		516			497			1,013			519		51.3	%
TOTAL REPORTABLE SEGMENTS	$	24,416		$	2,078		$	26,494		$	4,264		16.1	%
Eliminations / Other		190			(2,078	)		(1,887	)		(447	)
TOTAL IBM CONSOLIDATED	$	24,607		$	0		$	24,607		$	3,817		15.5	%

INTERNATIONAL BUSINESS MACHINES CORPORATION
U.S. GAAP TO OPERATING RESULTS RECONCILIATION
(Unaudited; Dollars in millions except per share amounts)
	FIRST-QUARTER 2012
				Acquisition-			Retirement-
				Related			Related			Operating
	GAAP			Adjustments*			Adjustments**			(Non-GAAP)
Gross Profit	$	11,118		$	89		$	71		$	11,278
Gross Profit Margin		45.1	%	0.4Pts			0.3Pts				45.7	%
S,G&A		5,886			(84	)		(36	)		5,766
R,D&E		1,601			0			4			1,605
Other (Income) & Expense		(58	)		(1	)		0			(59	)
Total Expense & Other (Income)		7,283			(85	)		(32	)		7,166
Pre-Tax Income		3,836			173			102			4,111
Pre-Tax Income Margin		15.5	%	0.7Pts			0.4Pts				16.7	%
Provision for Income Taxes***		769			47			30			846
Effective Tax Rate		20.1	%	0.3Pts			0.2Pts				20.6	%
Net Income		3,066			126			73			3,265
Net Income Margin		12.4	%	0.5Pts			0.3Pts				13.2	%
Diluted Earnings Per Share	$	2.61		$	0.11		$	0.06		$	2.78
	FIRST-QUARTER 2011
				Acquisition-			Retirement-
				Related			Related			Operating
	GAAP			Adjustments*			Adjustments**			(Non-GAAP)
Gross Profit	$	10,858		$	85		$	14		$	10,957
Gross Profit Margin		44.1	%	0.3Pts			0.1pts				44.5	%
S,G&A		5,826			(76	)		(10	)		5,740
R,D&E		1,587			0			19			1,606
Other (Income) & Expense		(202	)		(4	)		0			(206	)
Total Expense & Other (Income)		7,041			(80	)		10			6,971
Pre-Tax Income		3,817			165			4			3,986
Pre-Tax Income Margin		15.5	%	0.7Pts			0.0Pts				16.2	%
Provision for Income Taxes***		954			48			(6	)		997
Effective Tax Rate		25.0	%	0.2Pts			-0.2Pts				25.0	%
Net Income		2,863			117			10			2,990
Net Income Margin		11.6	%	0.5Pts			0.0Pts				12.1	%
Diluted Earnings Per Share	$	2.31		$	0.09		$	0.01		$	2.41

* Includes amortization of acquired intangible assets and other acquisition-related charges.
** Includes retirement-related items driven by changes to plan assets and liabilities primarily related to market performance.
*** Tax impact on operating (non-GAAP) pre-tax income is calculated under the same accounting principles applied to the GAAP pre-tax income which employs an annual effective tax rate method to the results.