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IBM Reports 2021 Third-Quarter Results

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·12-min read
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Revenue Performance Led by Consulting and Software; Solid Cash Generation

Highlights

Third Quarter:

  • Revenue of $17.6 billion, up 0.3 percent (down 0.2 percent adjusting for divested businesses and currency)
    - Cloud & Cognitive Software up 3 percent (up 2 percent adjusting for currency)
    - Global Business Services up 12 percent (up 11 percent adjusting for currency)

  • Revenue, up 2.5 percent (up 1.9 percent adjusting for divested businesses and currency), normalized to exclude Kyndryl to be separated in November

  • Net cash from operating activities of $16.1 billion and adjusted free cash flow of $11.1 billion, both up $0.3 billion over last 12 months

  • Total cloud revenue over last 12 months of $27.8 billion, up 14 percent (up 11 percent adjusting for divested businesses and currency)
    - Cloud & Cognitive Software cloud revenue up 31 percent (up 28 percent adjusting for currency)
    - Global Business Services cloud revenue up 30 percent (up 27 percent adjusting for currency)

  • Red Hat revenue up 17 percent, normalized for historical comparability

  • Debt reduced by $7.0 billion since year-end 2020

ARMONK, N.Y., October 21, 2021--(BUSINESS WIRE)--

IBM (NYSE: IBM) today announced third-quarter 2021 earnings results.

"With the separation of Kyndryl early next month, IBM takes the next step in our evolution as a platform-centric hybrid cloud and AI company," said Arvind Krishna, IBM chairman and chief executive officer. "We continue to make progress in our software and consulting businesses, which represent our higher growth opportunities. With our increased focus and agility to better serve clients, we are confident in achieving our medium-term objectives of mid-single digit revenue growth and strong free cash flow generation."

THIRD QUARTER 2021

All GAAP results include the impact of Kyndryl separation costs*

Pre-tax

Gross

Diluted

Net

Pre-tax

Income

Profit

EPS

Income

Income

Margin

Margin

GAAP from Continuing Operations

$

1.25

$

1.1B

$

1.3B

7.5

%

46.4

%

Year/Year

(34

)%

(33

)%

(28

)%

(2.9

)Pts

(1.6

)Pts

Operating (Non-GAAP)

$

2.52

$

2.3B

$

2.4B

13.6

%

48.0

%

Year/Year

(2

)%

(1

)%

(7

)%

(1.0

)Pts

(1.0

)Pts

GAAP EPS results include impacts related to the amortization of purchased intangible assets and other acquisition-related charges, retirement-related charges, U.S. tax reform enactment impacts, and transaction costs associated with the Kyndryl separation.

* Impact of Kyndryl separation costs for third quarter 2021 GAAP results: EPS ($0.56) per share; Net Income ($0.5B); Pre-tax Income ($0.3B); Pre-Tax Income Margin (1.6) points; Gross Profit Margin (0.6) points

"We again had solid cash generation for the quarter and over the last year, while maintaining a strong balance sheet and the liquidity to support our hybrid cloud and AI strategy," said James Kavanaugh, IBM senior vice president and chief financial officer. "Our post-separation portfolio mix is shifted toward our growth vectors, with a higher-value recurring revenue stream and strong cash generation, allowing us to continue to invest in the business and provide attractive shareholder returns."

Cash Flow and Balance Sheet

In the third quarter, the company generated net cash from operating activities of $2.7 billion. IBM’s free cash flow was $0.6 billion, which includes $0.6 billion of cash impacts from the company’s structural actions initiated in the fourth quarter of 2020 and the transaction costs associated with the separation of Kyndryl. IBM’s adjusted free cash flow, excluding these cash impacts, was $1.2 billion. The company returned $1.5 billion to shareholders in dividends.

Over the last 12 months, the company generated net cash from operating activities of $16.1 billion. IBM’s free cash flow for the last 12 months was $9.2 billion. The company’s adjusted free cash flow, excluding cash impacts of $1.8 billion for the structural actions and transaction separation costs, was $11.1 billion.

IBM ended the third quarter with $8.4 billion of cash on hand (includes marketable securities), down $5.9 billion from year-end 2020 reflecting acquisitions of $3.0 billion and debt reduction payments. Debt, including Global Financing debt of $15.9 billion, totaled $54.5 billion, down $7.0 billion since the end of 2020, and down $18.5 billion since closing the Red Hat acquisition.

Segment Results for Third Quarter

  • Cloud & Cognitive Software (includes Cloud & Data Platforms, Cognitive Applications and Transaction Processing Platforms) —revenues of $5.7 billion, up 2.5 percent (up 1.9 percent adjusting for currency). Cloud & Data Platforms grew 10 percent (up 9 percent adjusting for currency), Cognitive Applications revenue was flat (down 1 percent adjusting for currency) and Transaction Processing Platforms declined 9 percent. Cloud revenue up 21 percent (up 20 percent adjusting for currency).

  • Global Business Services (includes Consulting, Application Management and Global Process Services) — revenues of $4.4 billion, up 11.6 percent (up 11.0 percent adjusting for currency), with growth in Consulting, up 17 percent (up 16 percent adjusting for currency), Application Management up 5 percent, and Global Process Services up 19 percent. Cloud revenue up 38 percent (up 37 percent adjusting for currency).

  • Global Technology Services (includes Infrastructure & Cloud Services and Technology Support Services) — revenues of $6.2 billion, down 4.8 percent (down 5.4 percent adjusting for currency). Infrastructure & Cloud Services declined 5 percent (down 6 percent adjusting for currency) and Technology Support Services declined 4 percent (down 5 percent adjusting for currency). Cloud revenue up 1 percent (flat adjusting for currency). Gross profit margin up 120 basis points.

  • Systems (includes Systems Hardware and Operating Systems Software) — revenues of $1.1 billion, down 11.9 percent (down 12.4 percent adjusting for currency), driven by declines in IBM Z (down 33 percent) and Power systems down 24 percent (down 25 percent adjusting for currency). Storage Systems grew 11 percent. Cloud revenue down 42 percent (down 43 percent adjusting for currency).

  • Global Financing (includes financing and used equipment sales) — revenues of $220 million, down 19.2 percent (down 19.8 percent adjusting for currency).

Year-To-Date 2021 Results

Revenues for the nine-month period ended September 30, 2021 totaled $54.1 billion, an increase of 1.6 percent year to year (down 1 percent adjusting for divested businesses and currency) compared with $53.3 billion for the first nine months of 2020. Net income was $3.4 billion, down 19 percent year to year, reflecting the impact of $0.7 billion of transaction costs associated with the Kyndryl separation. Diluted earnings per share was $3.77 compared with $4.72 per diluted share for the 2020 period, a decrease of 20 percent.

GAAP earnings per share results include a ($2.85) per-share impact for charges related to amortization of purchased intangible assets and other acquisition-related charges, retirement-related charges, U.S. tax reform enactment impacts, and transaction costs associated with the Kyndryl separation. The impact of the Kyndryl separation costs was ($0.76) per share.

Operating (non-GAAP) net income for the nine months ended September 30, 2021 was $6.0 billion compared with $5.9 billion in the prior-year period, an increase of 1.3 percent. Operating (non-GAAP) diluted earnings per share from continuing operations was $6.62 compared with $6.60 per diluted share for the 2020 period, flat year to year.

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; 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; the possibility that the proposed separation of the managed infrastructure services unit of the company’s Global Technology Services segment will not be completed within the anticipated time period or at all, the possibility of disruption or unanticipated costs in connection with the proposed separation or the possibility that the separation will not achieve its intended benefits; 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; fluctuations in financial results; impact of local legal, economic, political, health and other conditions; the company’s failure to meet growth and productivity objectives; ineffective internal controls; the company’s use of accounting estimates; impairment of the company’s goodwill or amortizable intangible assets; 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; reliance on third party distribution channels and ecosystems; cybersecurity and data privacy considerations; adverse effects from environmental matters, tax matters; legal proceedings and investigatory risks; the company’s pension plans; currency fluctuations and customer financing risks; impact of changes in market liquidity conditions and customer credit risk on receivables; 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 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;

  • total revenue normalized to exclude Kyndryl to be separated in November;

  • Red Hat revenue normalized for historical comparability;

  • presenting operating (non-GAAP) earnings per share amounts and related income statement items;

  • free cash flow;

  • adjusted free cash flow.

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 https://www.ibm.com/investor/events/earnings-3q21. 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).

INTERNATIONAL BUSINESS MACHINES CORPORATION

COMPARATIVE FINANCIAL RESULTS

(Unaudited; Dollars in millions except per share amounts)

Three Months Ended

Nine Months Ended

September 30,

September 30,

2021

2020

2021

2020

REVENUE

Cloud & Cognitive Software

$

5,692

$

5,553

$

17,227

$

16,540

Global Business Services

4,427

3,965

13,002

11,992

Global Technology Services

6,154

6,462

18,866

19,245

Systems

1,107

1,257

4,251

4,477

Global Financing

220

273

702

837

Other

18

50

45

163

TOTAL REVENUE

17,618

17,560

54,093

53,253

GROSS PROFIT

8,171

8,430

25,379

25,052

GROSS PROFIT MARGIN

Cloud & Cognitive Software

77.0

%

77.1

%

77.1

%

76.6

%

Global Business Services

29.8

%

32.9

%

28.6

%

29.5

%

Global Technology Services

36.2

%

35.0

%

35.3

%

34.4

%

Systems

41.3

%

51.2

%

51.3

%

53.7

%

Global Financing

25.6

%

37.5

%

28.4

%

39.0

%

TOTAL GROSS PROFIT MARGIN

46.4

%

48.0

%

46.9

%

47.0

%

EXPENSE AND OTHER INCOME

S,G&A

4,860

4,647

15,368

15,849

R,D&E

1,621

1,515

4,907

4,722

Intellectual property and custom development income

(153

)

(134

)

(435

)

(453

)

Other (income) and expense

234

253

911

614

Interest expense

291

323

852

971

TOTAL EXPENSE AND OTHER INCOME

6,852

6,603

21,603

21,704

INCOME/(LOSS) FROM CONTINUING OPERATIONS

BEFORE INCOME TAXES

1,319

1,827

3,776

3,348

Pre-tax margin

7.5

%

10.4

%

7.0

%

6.3

%

Provision for/(Benefit from) income taxes

188

128

365

(888

)

Effective tax rate

14.3

%

7.0

%

9.7

%

(26.5

)

%

INCOME FROM CONTINUING OPERATIONS

$

1,130

$

1,698

$

3,411

$

4,237

DISCONTINUED OPERATIONS

Income/(Loss) from discontinued operations, net of taxes

(1

)

(1

)

(2

)

NET INCOME

$

1,130

$

1,698

$

3,410

$

4,234

EARNINGS/(LOSS) PER SHARE OF COMMON STOCK

Assuming Dilution

Continuing Operations

$

1.25

$

1.89

$

3.77

$

4.72

Discontinued Operations

$

0.00

$

0.00

$

0.00

$

0.00

TOTAL

$

1.25

$

1.89

$

3.77

$

4.72

Basic

Continuing Operations

$

1.26

$

1.90

$

3.81

$

4.76

Discontinued Operations

$

0.00

$

0.00

$

0.00

$

0.00

TOTAL

$

1.26

$

1.90

$

3.81

$

4.76

WEIGHTED-AVERAGE NUMBER OF COMMON SHARES OUTSTANDING (M’s)

Assuming Dilution

906.0

897.3

904.0

895.8

Basic

897.1

891.4

895.3

889.6

INTERNATIONAL BUSINESS MACHINES CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEET

(Unaudited)

At

At

September 30,

December 31,

(Dollars in Millions)

2021

2020

ASSETS:

Current Assets:

Cash and cash equivalents

$

7,455

$

13,212

Restricted cash

352

463

Marketable securities

600

600

Notes and accounts receivable - trade, net

6,609

7,132

Short-term financing receivables, net

7,161

10,892

Other accounts receivable, net

899

714

Inventories

1,891

1,839

Deferred costs

2,046

2,107

Prepaid expenses and other current assets

2,954

2,206

Total Current Assets

...

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