International Business Machines Corp 8-K, filed Apr 20, 2023
International Business Machines Corp (IBM)
About this 8-K
International Business Machines Corp filed this 8-K on April 20, 2023, reporting on events of April 19, 2023.
Items reported
- Item 7.01: Regulation FD disclosure
- Item 9.01: Financial statements and exhibits
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
CURRENT REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Item 7.01. Regulation FD Disclosure.
Exhibit 99.1 of this Form 8-K contains the prepared remarks for IBM’s Chairman and Chief Executive Officer Arvind Krishna and Chief Financial Officer Jim Kavanaugh’s first-quarter 2023 earnings presentation to investors on April 19, 2023.
The slides for IBM’s Chairman and Chief Executive Officer Arvind Krishna and Chief Financial Officer Jim Kavanaugh’s first-quarter 2023 earnings presentation on April 19, 2023, are Exhibit 99.2 to this Form 8-K.
Reconciliations of non-GAAP financial measures discussed in the earnings presentation to the most directly comparable financial measures calculated and presented in accordance with GAAP are included in Exhibit 99.2 of this Form 8-K.
The information in this Item 7.01, including the corresponding Exhibits 99.1 and 99.2, is being furnished with the Commission and shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934.
Item 9.01. Financial Statements and Exhibits.
(d) Exhibits
The following exhibits are being furnished as part of this report:
Exhibit No. | | Description of Exhibit |
99.1 99.2 | | Prepared Remarks of Earnings Presentation on April 19, 2023 Earnings Presentation of the Registrant, dated April 19, 2023 |
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The following exhibit is being filed as part of this report:
Exhibit No. | | Description of Exhibit |
104 | | Cover Page Interactive Data File (embedded within the Inline XBRL Document) |
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IBM’s web site (www.ibm.com) contains a significant amount of information about IBM, including financial and other information for investors (www.ibm.com/investor/). IBM encourages investors to visit its various web sites from time to time, as information is updated and new information is posted.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, hereunto duly authorized.
Date: April 20, 2023 | | |
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| By: | /s/ Nicolás A. Fehring |
| | Nicolás A. Fehring |
| | Vice President and Controller |
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Exhibit 99.1
IBM 1Q23 Earnings Prepared Remarks
Introduction
Thank you. This is Patricia Murphy, and I’d like to welcome you to IBM’s first quarter 2023 earnings presentation. I’m here today with Arvind Krishna, IBM’s Chairman and Chief Executive Officer, and Jim Kavanaugh, IBM’s Senior Vice President and Chief Financial Officer. We’ll post today’s prepared remarks on the IBM investor website within a couple of hours, and a replay will be available by this time tomorrow.
To provide additional information to our investors, our presentation includes certain non-GAAP measures. For example, all of our references to revenue growth are at constant currency. We have provided reconciliation charts for these and other non-GAAP measures at the end of the presentation, which is posted to our investor website.
Finally, some comments made in this presentation may be considered forward looking under the Private Securities Litigation Reform Act of 1995. These statements involve factors that could cause our actual results to differ materially. Additional information about these factors is included in the company’s SEC filings.
So with that, I’ll turn the call over to Arvind.
CEO Perspective
Thank you for joining us. Our first quarter results demonstrate that clients continue to turn to IBM to help them address today’s business needs while positioning them for the future. We had a good start to the year, with mid-single digit revenue growth at constant currency, in line with our mid-term model, and growth in free cash flow. Performance was led by software and consulting, as clients continue to accelerate their digital transformations, modernize their applications, automate their workflows and create flexible and secure hybrid cloud environments. More recently, clients are prioritizing digital transformation projects that focus on cost take out, productivity and quick returns. While demand for our offerings that support these priorities remains solid, we are seeing some deceleration in Consulting from the previous robust growth levels – especially in the United States.
Globally, our clients continue to see technology as a fundamental source of competitive advantage. Technology helps them scale and enhance productivity, which is especially important in the face of inflation, demographic shifts, cybersecurity, supply chain issues and sustainability goals. All of this supports our revenue growth expectations for the year. Our focus remains on revenue growth and free cash flow.
Ninety days ago, I shared that in 2023 we’d continue to unlock more productivity, expand our strategic partnerships and put more investment in specific growth markets. Productivity has always been an important part of our business model. It frees up spending and increases financial flexibility to enable investments. We have started to see some of this payback in our results, which gives us confidence in our ability to achieve our full year free cash flow objectives.
Let me spend a few minutes on the progress we have made in the execution of our strategy. Our focus is on hybrid cloud and artificial intelligence – the two most influential technologies for business. In tandem, these technologies drive both business outcomes and innovation.
Hybrid cloud is now the most prominent form of IT architecture – and our approach is platform centric. Red Hat OpenShift is the leading container platform, enabling clients to leverage the latest innovations in open-source software. IBM software and infrastructure have been tailored for this platform. Our consultants use their technical and business knowledge to speed up clients’ digital transformation processes. In the first quarter, we co-created with more clients to unlock business value from a hybrid cloud approach. We are working with Virgin Money to migrate their credit card service to the IBM Cloud for Financial Services. They will also leverage IBM’s consulting capabilities to create new digital customer experiences. For the Boston Red Sox, we are collaborating with Wasabi Technologies, leveraging hybrid cloud technologies to analyze key data sources that improve the club’s operations.
The second element of our strategy is top of mind for a lot of clients – artificial intelligence. AI is projected to add $16 trillion to the global economy by 2030. Keep in mind that AI for business is different than AI for consumers given their need for more accurate results, trusted data and governance tools. AI techniques such as foundation models, large language models and generative AI, give businesses the ability to create 100 AI models from a single data set. Early client engagements experience a 70 percent faster time to value. That is why we are seeing a lot more interest from business in using AI to boost productivity and reduce cost. Productivity gains will come from enterprises turning their workflows into simpler, automated processes with AI. To achieve this, we are collaborating with companies like Citi to enhance their internal audit
and compliance processes through AI. J.B. Hunt Transport used our Turbonomic AI-powered resourcing and automation engine to optimize their cloud environment. This helped reduce infrastructure refresh costs by 75 percent. This is a great example of the work we’re doing in IT operations. In other areas such as customer care, we are automating hundreds of thousands of call center responses with AI with more than 90 percent accuracy and greater levels of customer satisfaction. In cybersecurity, our elite defense teams are deploying AI to defend against criminals in real time. In digital labor, we are helping finance, accounting, and HR teams save thousands of hours by automating what used to be labor-intensive, data-entry tasks.
To bring our hybrid cloud and AI strategy to market, our partner ecosystem continues to play a critical role. We expanded our partnership with Adobe to help marketing and creative organizations make the production of content easier. IBM and EY announced a collaboration using IBM’s software in EY's sustainability consulting practice to help companies operationalize decarbonization action plans. Juniper Networks and Nokia also recently expanded their collaboration around IBM's network intelligence and automation solutions to monetize and optimize investments in networks more effectively.
We remain focused on delivering new innovations that matter to our clients. A good example of this is the Cleveland Clinic-IBM Discovery Accelerator where multiple projects are underway that leverage the latest in quantum computing, artificial intelligence and hybrid cloud to help expedite discoveries in biomedical research. At the Cleveland Clinic, we also recently unveiled the first quantum computer dedicated to healthcare research. To complement our own innovations, in the first quarter we acquired three companies that extend our capabilities in hybrid cloud and AI.
We also continue to engage in projects that have a positive impact on society. Many clients are leveraging our technology and expertise to advance their sustainability agendas. For example, in the area of manufacturing, Siemens and IBM are announcing a new software solution that integrates software from both companies to enable sustainable product development. Sustainability is a focus area for all business, and just last week we released our annual report on IBM’s efforts in this area: IBM Impact. I’d encourage you to read about our progress in areas ranging from energy savings and carbon emissions reduction, to skills development and increasing diversity.
I’ll conclude by saying that we are confident in the changes we have made to our business over the last three years, aligning our strategy, priorities and portfolio to the needs of our clients. This work, together with our continued focus on productivity, are enabling us to deliver sustainable revenue and free cash flow growth.
I'll now hand it over to Jim, who will offer more insight into our performance and expectations.
Financial Highlights
Thanks Arvind. I’ll start with the financial highlights of the first quarter. We delivered $14.3 billion in revenue, $1.4 billion of operating pre-tax income, $1.36 of operating earnings per share, and $1.3 billion of free cash flow. Our revenue for the quarter was up about four-and-a-half percent at constant currency. That includes over a point of impact from the businesses we divested. Currency rates impacted our reported revenue growth by four points – that is over $100 million more than spot rates would have suggested 90 days ago. As always, I’ll focus my comments on constant currency.
Revenue growth this quarter was led by Software and Consulting. Software revenue was up nearly six percent and Consulting up eight percent. These are our growth vectors and now represent about three quarters of our annual revenue. Our Infrastructure revenue was flat, with continued strength in zSystems. All three of our geographies grew, with high single-digit growth in both EMEA and Asia Pacific. Across our business, more than half of IBM’s revenue is recurring, led by high-value software, which is growing at a mid-single digit rate.
Looking at our profit metrics for the quarter, operating gross margin expanded 80 basis points. We expanded gross margin in all segments, with a strong portfolio mix overall. Operating pre-tax income, excluding the impact of workforce rebalancing, was up 12 percent and margin expanded 130 basis points. You’ll recall back in January I mentioned we were planning to address remaining stranded costs from our portfolio actions and we anticipated a charge of about $300 million. As we executed our plan, we took a charge of $260 million in the first quarter, and we expect to complete this action in the second quarter. This workforce rebalancing charge primarily addresses indirect support
functions. We are no longer including workforce rebalancing charges in our measure of segment profit to provide a view of our segment results consistent with our ongoing operational profile. At the IBM level, including the workforce rebalancing activity, operating pre-tax income was down four percent and margin was down 50 basis points.
Within our margin performance, we absorbed a significant currency headwind. The combination of translation and hedging impacted operating pre-tax profit growth by about $160 million and operating PTI margin by 70 basis points year to year. As I’ve discussed in the past, this essentially impacts our product-based businesses. Mitigating that, the change in useful lives of our server and networking equipment provides a 50-basis point year-to-year benefit to operating PTI margin, which is included primarily in our Infrastructure segment.
Taking it back up a level, IBM’s profit performance this quarter benefits from improvements in business mix and ongoing productivity initiatives. We’ve been digitally transforming IBM, much in the same way we’re helping our clients with their transformations – using both IBM and third-party capabilities. Think of IBM as client zero. We are driving G&A efficiencies by reimagining and transforming the way we work. This includes optimizing our infrastructure and application environments, as well as redesigning our end-to-end business processes. Let me give you a few examples. Across IBM’s IT environment, we’re realizing the value of hybrid cloud. We reduced the average cost of running an application by 90 percent by moving from a legacy data center environment to a hybrid cloud environment running on Red Hat OpenShift. We’ve been simplifying our application environment. By standardizing global processes and applying AI Ops, we are reducing our application portfolio by more than 35 percent. We’ve automated over 24 million transactions with RPA, avoiding hundreds of thousands of manual tasks and eliminating the risk of human
error. And we’re deploying AI at scale to reengineer our business processes. We’re doing that in areas like HR and talent, finance and end-to-end processes like Quote-to-Cash and Source-to-Pay. For example, in HR, we now handle 94 percent of our company-wide HR inquiries with our AskHR digital assistant, speeding up the completion of many HR tasks by up to 75 percent. These productivity initiatives free up spending for reinvestment and contribute to margin expansion.
Turning to free cash flow, we generated $1.3 billion in the quarter. This is up $100 million year to year and puts us on track to our full year expectation. Growth is driven by our profit performance and working capital efficiencies, as well as lower payments for structural actions. This was mitigated by an increase in capital expenditures and higher performance-based compensation payments given last year’s strong results. In terms of cash uses, we returned a billion and a half dollars to shareholders in the form of dividends.
From a balance sheet perspective, we have a very strong liquidity position with cash over $17 billion – which is up nearly $9 billion from December. We have been opportunistic in accessing the debt market and issued debt early in the year to prudently get ahead of 2023 and 2024 maturities. Our debt balance at the end of the first quarter was over $58 billion, up nearly $8 billion from year end.
Software
Turning to the segments, Software revenue grew nearly six percent, in line with Software’s mid-single digit model. We had growth in both Hybrid Platform & Solutions and Transaction Processing. This performance captures the benefits of our growing recurring revenue stream, which is about 80 percent of annual software revenue – with continued strong renewal rates. This, together with growth in software transactions this quarter, demonstrates clients’ commitment to our hybrid cloud and AI platforms.
In Hybrid Platform & Solutions, revenue was up five percent, fueled by growth across all business areas. We continue to see client demand for broad capabilities across Red Hat, Automation, Data & AI and Security. Red Hat revenue grew 11 percent, with growth across all major offerings. We had particular strength in our hybrid cloud platform, OpenShift, and Ansible, our IT automation solution. Both offerings also continued to take market share this quarter. Automation revenue was up two percent, driven by Integration and Application Servers, given client demand for improved IT performance and cost. In Data & AI, revenue grew three percent, reflecting growth across Data Management, Business Analytics and Asset & Supply Chain Management. Many of these offerings, like DB2, serve as the underpinnings for modern AI and mission-critical workloads. Security revenue was up two percent, with growth across security for hybrid cloud, which includes both identity and threat management, and security for data. Bringing this all together, our Hybrid Platform & Solutions ARR is now at thirteen-and-a-half billion dollars.
In Transaction Processing, revenue grew six-and-a-half percent. This software remains core to our clients’ hybrid cloud strategies. The strong performance of the last couple of zSystems cycles drove significant
capacity growth. In fact, installed MIPs growth during our z15 cycle was two times that of z14. This translates to software opportunity and contributed to growth in both recurring and transactional revenue. Layering in this year’s price increases, we delivered good performance in Transaction Processing this quarter.
Moving to profit for the Software segment, gross margin was up, and pre-tax margin was flat this quarter, with the latter absorbing nearly a point of impact from currency.
Consulting
Consulting revenue was up eight percent, and I’ll remind you we had strong growth in the first quarter of last year. Our book-to-bill ratio over the last twelve months was 1.07. Signings in the quarter grew seven percent, with similar performance across both larger and smaller engagements. We continue to see broad demand for projects that deliver technology-driven transformations leveraging a hybrid cloud environment. Within the quarter, demand was solid for cloud modernization offerings, and we had one of our largest Red Hat signings quarters ever. More recently, clients are particularly focused on driving productivity and cost reductions, with greater agility and faster time to value. This is contributing to signings growth from digital transformations in areas such as talent, finance and supply chain transformations. In terms of revenue, while we had solid growth overall, we have seen some clients in the U.S. pull back on more discretionary projects, impacting backlog realization within the quarter.
Bringing it back up to the global level, Business Transformation grew six percent, Technology Consulting grew four percent and Application Operations grew 13 percent. Revenue growth was led by data and customer experience transformation projects, in addition to cloud application development and management. Our hybrid cloud expertise, and depth and breadth of strategic partnerships, differentiate IBM Consulting in today’s market. Red Hat consulting revenue, now over $2 billion annually, continued to grow at a double-digit rate. And our strategic partnerships continued strong growth, making up over 35 percent of our revenue in the segment over the last twelve months.
Moving to Consulting profit, we expanded both gross and pre-tax margins. Our pre-tax margin of about eight percent in the quarter was up 50 basis points year to year, as we continue to benefit from the productivity actions we’ve taken.
Infrastructure
Turning to the Infrastructure segment, revenue was flat. Hybrid Infrastructure revenue was up four percent and Infrastructure Support revenue was down four percent.
Within Hybrid Infrastructure, zSystems revenue was up 11 percent. This was the fourth quarter of z16 availability, and the solid program performance has outpaced that of prior cycles. In addition to capabilities around embedded AI at scale, cloud native development for hybrid cloud and cyber-resilient security, clients are also leveraging z16 for its energy efficiency. For example, consolidating Linux workloads on a single z16 system can reduce energy consumption by up to 75 percent. We continue to see strong growth in shipped MIPs for new Linux workloads on z16. Distributed Infrastructure revenue was flat. Growth in Storage was offset by declines in Power as we have wrapped on the launch of the Power10 high-end systems.
Moving to Infrastructure profit, we expanded both gross and pre-tax margins. The 80-basis point improvement in pre-tax margin reflects benefits from both the zSystems product cycle and changes in useful life, partially offset by nearly two points of currency impacts.
Summary
Now let me bring it back up to the IBM level to wrap it up. When we first introduced “today’s IBM” back in October of 2021, we provided a mid-term model for revenue growth, margin expansion and free cash flow growth. We delivered on that model throughout last year and now have a good start to 2023. In the first quarter, we delivered constant currency revenue growth in line with our mid-single digit model, expanded gross margin, drove productivity in our underlying business and grew our free cash flow.
Looking at full year 2023, as always, I’ll start with our two primary metrics – revenue growth and free cash flow. On the top line, we expect constant currency revenue growth of three to five percent. And we continue to expect free cash flow of about ten-and-a-half billion dollars – which is up over a billion dollars year to year. Inherent in our mid-term model is margin expansion, driven by improving business mix, efficiency initiatives and productivity enhancements. Driving efficiency and productivity has always been a part of our operating and financial models. I mentioned some of the initiatives we have underway, and we continue to evaluate additional actions. All together, the current initiatives are expected to deliver $2 billion in annual run-rate savings by the end of 2024. These initiatives provide additional flexibility – enabling reinvestment in the business to support future growth, contributing to margin expansion and increasing financial flexibility.
Let me spend a minute on our expectations for constant currency revenue and pre-tax profit performance by segment. In Software – we continue to expect revenue growth in line with Software’s mid-single digit model. This revenue growth drives operating leverage, and we still expect Software pre-tax margin to expand by about two points year to year. In Consulting,
we continue to see strong demand for digital transformations and application modernization – though as I said, we are seeing some pressure on more discretionary projects in the United States. We now see Consulting revenue growth in the range of six to eight percent and continue to expect to expand Consulting pre-tax margin by at least a point as we capitalize on the yield of our productivity actions. Infrastructure revenue is roughly flat over the mid-term model horizon, with performance in any year reflecting product cycle dynamics. We’re about to wrap on the z16 introduction. As a result, we expect 2023 Infrastructure revenue to decline, with pre-tax margin in the low teens. To provide some perspective, Infrastructure should impact IBM’s overall revenue growth by over a point.
With these segment dynamics, we would expect IBM’s operating pre-tax margin to expand by about a half a point year to year – that’s in line with our model. And we continue to expect our tax rate to be in the mid-to-high-teens range.
As I mentioned earlier, the dollar has strengthened over the last 90 days. We now expect currency translation to be fairly neutral to our revenue growth for the year, which is about a half a point worse than 90 days ago. I’ll remind you that our profit and cash dynamics this year are impacted by the unwinding of last year’s hedging gains – which is about a point of headwind to our pre-tax margin expansion.
Looking at the second quarter, we expect first to second quarter revenue seasonality to be fairly consistent with last year – that’s up about $1.3 billion – though the underlying dynamics are different due primarily to zSystems product cycle and currency. I’ll remind you, we had a successful launch of our z16 in the second quarter of last year, and that creates a year-to-year headwind to growth of about three points. In terms of profit,
we now expect a little over one-third of our operating net income in the first half and just under two-thirds in the second half. This reflects a first-half headwind from currency and workforce rebalancing dynamics, both of which flip to a tailwind in the second half. I mentioned the workforce rebalancing activity we have underway. Between the first and second quarter, the charge should be in the range of $300 million – maybe a little more. We still expect this action to pay back by the end of the year.
In closing, we entered the year as a more focused business with solid fundamentals. We had a good start to 2023, and are positioned to deliver revenue growth, expand margin and grow free cash flow for the year. I’m happy to provide more color on the quarter and our expectations in the Q&A.
Patricia, let’s get started.
Closing
Thank you, Jim. Before we begin the Q&A, I’d like to mention a couple of items. First, supplemental information is provided at the end of the presentation. And then second, as always, I’d ask you to refrain from multi-part questions.
Operator, let’s please open it up for questions.
| IBM 1Q 2023 Earnings April 19, 2023 ibm.com/investor |
| Forward-looking statements and non-GAAP information Certain comments made in this presentation may be characterized as forward looking under 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. Those statements by their nature address matters that are uncertain to different degrees. Those statements involve a number of factors that could cause actual results to differ materially. Additional information concerning these factors is contained in the Company’s filings with the SEC. Copies are available from the SEC, from the IBM website, or from IBM Investor Relations. Any forward-looking statement made during this presentation speaks only as of the date on which it is made. The company assumes no obligation to update or revise any forward-looking statements except as required by law; these charts and the associated remarks and comments are integrally related and are intended to be presented and understood together. In an effort to provide additional and useful information regarding the company’s financial results and other financial information as determined by generally accepted accounting principles (GAAP), the company also discusses, in its earnings press release and presentation materials, certain non-GAAP information including operating earnings and other “operating” financial measures, operating pre-tax income and margin excluding the impact of workforce rebalancing, free cash flow, net cash from operating activities excluding IBM Financing receivables, and adjustments for currency. The rationale for management’s use of this non-GAAP information is included as Exhibit 99.2 to the company’s Form 8-K submitted to the SEC on April 19, 2023. The reconciliation of non-GAAP information to GAAP is included in the press release within Exhibit 99.1 to the company’s Form 8-K submitted to the SEC on April 19, 2023, as well as on the slides entitled “Non-GAAP supplemental materials” in this presentation. To provide better transparency, the company also discusses management performance metrics including annual recurring revenue, signings, and book-to-bill. The metrics are used to monitor the performance of the business and are viewed as useful decision-making information for management and stakeholders. The rationale for management’s use of these performance metrics and their calculation are included in the Management Discussion section of the company’s 2022 Annual Report, which is Exhibit 13 to the Form 10-K submitted with the SEC on February 28, 2023. For other related information please visit the Company’s investor relations website at: https://www.ibm.com/investor/events/earnings-1Q23 2 |
| 3 Arvind Krishna Chairman and Chief Executive Officer James Kavanaugh SVP, Finance & Operations, Chief Financial Officer |
| “Our first quarter results demonstrate that clients are continuing to turn to IBM for our unique combination of an open hybrid cloud platform, enterprise-focused AI, and business expertise to unlock productivity and drive efficiency in their operations. This gives us confidence in our current growth expectations for revenue and free cash flow for the year.” Arvind Krishna IBM Chairman and CEO 4 1Q23 Performance Clients, ecosystem and innovation Hybrid cloud and AI progress CEO perspective |
| $14.3B Revenue $1.3B Free Cash Flow 1Q23 Financial highlights Revenue growth rates @CC 5 4% Revenue growth ~75% Revenue mix in software and consulting >50% Recurring revenue mix “In the quarter, we remained focused on the fundamentals of our business, increasing productivity and generating operating leverage. As a result, we again expanded our gross profit margin, improved our underlying profit performance and increased our cash generation. We are well-positioned to continue investing for growth and returning value to shareholders through dividends.” James Kavanaugh IBM SVP & CFO 80bps Gross margin expansion (operating) 130bps Operating pre-tax margin expansion excl. workforce rebalancing $17.6B Cash and marketable securities |
| Broad-based growth across the portfolio Solid and growing recurring revenue; Hybrid Platform & Solutions annual recurring revenue of $13.5 billion OpenShift annual recurring revenue of $1 billion Gross margin expansion 6 $5.9B Revenue Revenue categories Transaction Processing +7% yr/yr +6% Revenue growth Hybrid Platform & Solutions +5% yr/yr Red Hat 11% Automation 2% Data & AI 3% Security 2% Software 1Q23 results; revenue growth rates @CC |
| 7 $5.0B Revenue Revenue categories Application Operations +13% yr/yr +8% Revenue growth Continued strength in technology-driven transformations Growth across all revenue categories and geographies Book-to-bill ratio of 1.07 for the last year Gross and pre-tax margin expansion Technology Consulting +4% yr/yr Business Transformation +6% yr/yr Consulting 1Q23 results; revenue growth rates @CC |
| 8 $3.1B Revenue Revenue categories Infrastructure Support (4%) yr/yr Flat Revenue growth Hybrid Infrastructure +4% yr/yr zSystems +11% Distributed Infrastructure Flat zSystems performance reflects solid demand in the fourth quarter of z16 cycle Distributed Infrastructure performance driven by Storage growth offset by Power10 wrap Gross and pre-tax margin expansion Infrastructure 1Q23 results; revenue growth rates @CC |
| 9 Summary 1Q23 Summary Solid start to the year Client demand for digital transformations with focus on cost reduction and ROI Delivering growth and productivity 2023 Expectations Revenue growth of 3% to 5% @CC Free cash flow of ~$10½ billion, up >$1 billion yr/yr |
| ibm.com/investor |
| 11 Supplemental material ● Revenue and P&L highlights ● Cash flow and balance sheet highlights ● Currency impact on revenue growth ● Software & Infrastructure segment details ● Consulting segment details ● Expense summary ● Balance sheet summary ● Cash flow summary ● Cash flow (ASC 230) ● Software segment revenue categories ● Consulting segment revenue categories ● Infrastructure segment revenue categories ● Non-GAAP supplemental materials Some columns and rows in these materials, including the supplemental exhibits, may not add due to rounding |
| 12 Revenue and P&L highlights Revenue growth rates @CC, $ in billions *Yr/Yr reflects impact of ($0.26B) workforce rebalancing charges in 1Q23 Revenue highlights 1Q23 B/(W) Yr/Yr Revenue $14.3 4% Americas $7.1 1% Europe/ME/Africa $4.3 8% Asia Pacific $2.8 7% Operating P&L highlights $ 1Q23 B/(W) impact of Yr/Yr WFR* Gross profit $7.7 2% Expense $6.2 (3%) (4 pts) Pre-tax income $1.4 (4%) (17 pts) Net income $1.2 (2%) (16 pts) Earnings per share $1.36 (3%) (16 pts) Operating P&L highlights % 1Q23 B/(W) impact of Yr/Yr WFR* Gross profit margin 53.7% 0.8 pts Expense E/R 43.6% (1.3 pts) (1.8 pts) Pre-tax income margin 10.2% (0.5 pts) (1.8 pts) Net income margin 8.8% (0.2 pts) (1.4 pts) Tax rate 13.8% 2.3 pts |
| 13 Cash flow and balance sheet highlights $ in billions *1Q22 includes immaterial cash flows from discontinued operations **Non-GAAP financial measure; excludes Financing receivables ***Non-GAAP financial measure; adjusts for Financing receivables and net capital expenditures Balance sheet Mar 23 Dec 22 Mar 22 Cash & marketable securities $17.6 $8.8 $10.8 Total debt $58.7 $50.9 $54.2 Selected debt measures Mar 23 Dec 22 Mar 22 IBM Financing debt $10.5 $12.9 $12.2 Core (non-IBM Financing) debt $48.2 $38.1 $42.1 Cash flow 1Q23 Yr/Yr Net cash from operations** $1.8 $0.2 Free cash flow*** $1.3 $0.1 Selected uses of cash 1Q23 Yr/Yr Net capital expenditures $0.5 $0.1 Acquisitions $0.0 $0.7 Dividends $1.5 $0.0 * |
| 14 Currency impact on revenue growth Quarterly averages per US $ 1Q23 Yr/Yr Spot 2Q23 3Q23 4Q23 FY23 4/18/23 Euro 0.93 (5%) 0.91 3% 8% 7% 4% Pound 0.82 (10%) 0.80 (1%) 5% 6% 0% Yen 132 (14%) 134 (3%) 3% 5% (2%) Revenue impact, future @ 4/18/23 Spot (4 pts) (0-1 pts) 2-3 pts 2-3 pts ~0 pts Prior view @ 1/14/23 Spot (3-4 pts) (0-1 pts) 2-3 pts 2-3 pts 0-1 pts US $B Yr/Yr Revenue as reported $14.3 0.4% Currency impact ($0.6) (4.0 pts) Revenue @CC 4.4% |
| 15 Software & Infrastructure segment details Revenue growth rates @CC, $ in billions *Annual recurring revenue for Hybrid Platform & Solutions, growth rate @CC Software segment 1Q23 B/(W) Yr/Yr Revenue $5.9 6% Hybrid Platform & Solutions $4.2 5% Red Hat 11% Automation 2% Data & AI 3% Security 2% Transaction Processing $1.7 7% Pre-tax income $1.2 3% Pre-tax income margin 19.7% Flat Annual recurring revenue* $13.5 7% Infrastructure segment 1Q23 B/(W) Yr/Yr Revenue $3.1 Flat Hybrid Infrastructure $1.7 4% zSystems 11% Distributed Infrastructure Flat Infrastructure Support $1.4 (4%) Pre-tax income $0.2 8% Pre-tax income margin 7.0% 0.8 pts |
| 16 Consulting segment details Consulting segment 1Q23 B/(W) Yr/Yr Revenue $5.0 8% Business Transformation $2.3 6% Technology Consulting $0.9 4% Application Operations $1.7 13% Gross profit margin 25.2% 0.9 pts Pre-tax income $0.4 10% Pre-tax income margin 7.7% 0.5 pts Signings $5.2 7% Book-to-bill ratio (TTM) 1.07 Revenue & signings growth rates @CC, $ in billions |
| 17 Expense summary $ in billions *includes acquisitions in the last twelve months net of non-operating acquisition-related charges and includes impact of closed divested businesses **represents the percentage change after excluding the impact of currency translation & hedges, acquisitions and divestitures Expense 1Q23 B/(W) Acq/ Yr/Yr Currency Divest* Base** SG&A – operating $4.6 (7%) 2 pts 0 pts (10 pts) impact of workforce rebalancing $0.3 (6 pts) (6 pts) RD&E $1.7 1% 2 pts 4 pts (4 pts) IP and custom development income ($0.2) 49% Other (income)/expense - operating ($0.2) 35% Interest expense $0.4 (18%) Operating expense & other income $6.2 (3%) 2 pts 1 pts (7 pts) impact of workforce rebalancing $0.3 (4 pts) (4 pts) |
| 18 Balance sheet summary $ in billions *includes eliminations of inter-company activity Mar 23 Dec 22 Mar 22 Cash & marketable securities $17.6 $8.8 $10.8 Core (non-IBM Financing) assets* $103.6 $103.4 $108.9 IBM Financing assets $12.5 $15.0 $13.6 Total assets $133.6 $127.2 $133.3 Other liabilities $53.3 $54.3 $59.9 Core (non-IBM Financing) debt* $48.2 $38.1 $42.1 IBM Financing debt $10.5 $12.9 $12.2 Total debt $58.7 $50.9 $54.2 Total liabilities $112.0 $105.2 $114.2 Equity $21.7 $22.0 $19.1 |
| 19 Cash flow summary $ in billions *1Q22 includes immaterial cash flows from discontinued operations B/(W) 1Q23 Yr/Yr* Net cash from operations $3.8 $0.5 Less: IBM Financing receivables $2.0 $0.3 Net cash from operations (excluding IBM Financing receivables) $1.8 $0.2 Net capital expenditures ($0.5) ($0.1) Free cash flow (excluding IBM Financing receivables) $1.3 $0.1 Acquisitions ($0.0) $0.7 Divestitures — ($0.1) Dividends ($1.5) ($0.0) Non-IBM Financing debt $9.7 $5.0 Other (includes IBM Financing net A/R & IBM Financing debt) ($0.8) ($0.2) Change in cash & marketable securities $8.8 $5.5 |
| 20 Cash flow (ASC230) 1Q23 1Q22 Net income from operations $0.9 $0.7 Depreciation / amortization of intangibles $1.1 $1.3 Stock-based compensation $0.3 $0.2 Working capital / other ($0.5) ($0.6) IBM Financing A/R $2.0 $1.6 Net cash provided by operating activities $3.8 $3.2 Capital expenditures, net of payments & proceeds ($0.5) ($0.4) Divestitures, net of cash transferred — $0.1 Acquisitions, net of cash acquired ($0.0) ($0.7) Marketable securities / other investments, net ($7.5) ($0.3) Net cash provided by/(used in) investing activities ($8.0) ($1.4) Debt, net of payments & proceeds $7.3 $2.9 Dividends ($1.5) ($1.5) Financing - other ($0.1) ($0.1) Net cash provided by/(used in) financing activities $5.7 $1.4 Effect of exchange rate changes on cash $0.0 ($0.0) Net change in cash, cash equivalents & restricted cash $1.5 $3.3 $ in billions 1Q22 includes immaterial cash flows from discontinued operations |
| 21 Software segment categories Revenue categories Revenue categories – FY 2022 Red Hat Automation Data & AI Security Hybrid Platform & Solutions Transaction Processing Hybrid Platform & Solutions Software, infused with AI, to help clients operate, manage, and optimize their IT resources and business processes within hybrid, multi-cloud environments Red Hat: incl. RHEL, OpenShift, Ansible Automation: incl. business automation, AIOps and management, integration, and application servers Data & AI: incl. data fabric, customer care, data management, business analytics, dataops & governance, asset & supply chain management, information exchange and weather Security: incl. software and services for threat, data and identity Transaction Processing Software that supports clients’ mission-critical on-premise workloads in industries such as banking, airlines and retail incl. transaction processing software such as Customer Information Control System and storage software, and analytics and integration software running on IBM operating systems (e.g., DB2 and WebSphere running on z/OS) |
| 22 Consulting segment categories Revenue categories Business Transformation Technology Consulting Application Operations Revenue categories – FY 2022 Business Transformation Strategy, process design, system implementation and operations services to improve and transform key business processes. Deploys AI and automation in business processes to exploit the value of data and includes an ecosystem of partners alongside IBM technology, which includes strategic partnerships with Adobe, Oracle, Salesforce and SAP, among others Technology Consulting Skills to architect and implement cloud platforms, including Amazon, Microsoft and IBM, and strategies to transform the enterprise experience and enable innovation, including application modernization for hybrid cloud with Red Hat OpenShift Application Operations Application and cloud platform services required to operationalize and run cloud platforms. Facilitates clients’ efforts to manage, optimize and orchestrate application and data workloads across platforms and environments through both custom applications and ISV packages |
| 23 Infrastructure segment categories Revenue categories Revenue categories – FY 2022 Hybrid Infrastructure Innovative infrastructure platforms to help meet the new requirements of hybrid multi-cloud and enterprise AI workloads leveraging flexible and as-a-service consumption models zSystems: incl. hardware and operating system Distributed Infrastructure: incl. Power hardware and operating system, storage hardware, IBM Cloud IaaS, OEM asset recovery service Infrastructure Support Comprehensive, proactive and AI enabled services to maintain and improve the availability and value of clients’ IT infrastructure (hardware and software) both on-premises and in the cloud incl. maintenance for IBM products and other technology platforms zSystems Distributed Infrastructure Hybrid Infrastructure Infrastructure Support |
| 24 Non-GAAP supplemental materials The above reconciles the non-GAAP financial information contained in the “Financial highlights”, “Revenue and P&L highlights”, and “Prepared remarks” discussions in the company’s earnings presentation. See Exhibit 99.2 included in the company’s Form 8-K dated April 19, 2023, for additional information on the use of these Non-GAAP financial measures. Reconciliation of revenue performance - 1Q 2023 GAAP @CC Total revenue Flat 4% Americas Flat 1% Europe/ME/Africa 2% 8% Asia Pacific (2%) 7% 1Q23 Yr/Yr |
| 25 Non-GAAP supplemental materials The above reconciles the non-GAAP financial information contained in the “Software”, “Consulting”, “Infrastructure”, “Software & Infrastructure segment details”, “Consulting segment details”, and “Prepared remarks” discussions in the company’s earnings presentation. See Exhibit 99.2 included in the company’s Form 8-K dated April 19, 2023, for additional information on the use of these Non-GAAP financial measures. Reconciliation of segment revenue performance - 1Q 2023 GAAP @CC Software 3% 6% Hybrid Platform & Solutions 2% 5% Red Hat 8% 11% Automation (1%) 2% Data & AI 1% 3% Security (1%) 2% Transaction Processing 3% 7% 1Q23 Yr/Yr GAAP @CC Consulting 3% 8% Business Transformation 1% 6% Technology Consulting (1%) 4% Application Operations 7% 13% Infrastructure (4%) Flat Hybrid Infrastructure 1% 4% zSystems 7% 11% Distributed Infrastructure (3%) Flat Infrastructure Support (9%) (4%) 1Q23 Yr/Yr |
| 26 Non-GAAP supplemental materials *represents the percentage change after excluding the impact of currency translation & hedges, acquisitions and divestitures. The above reconciles the non-GAAP financial information contained in the “Expense summary” discussion in the company’s earnings presentation. See Exhibit 99.2 included in the company’s Form 8-K dated April 19, 2023, for additional information on the use of these Non-GAAP financial measures. Reconciliation of expense summary - 1Q 2023 GAAP Non-GAAP Operating adjustments (non-GAAP) SG&A Currency 2 pts 0 pts 2 pts Acquisitions/divestitures 0 pts 0 pts 0 pts Base* (8 pts) (1 pts) (10 pts) RD&E Currency 2 pts 0 pts 2 pts Acquisitions/divestitures 4 pts 0 pts 4 pts Base* (4 pts) 0 pts (4 pts) Operating expense & other income Currency 2 pts 0 pts 2 pts Acquisitions/divestitures 1 pts 0 pts 1 pts Base* 1 pts (8 pts) (7 pts) 1Q23 |
| 27 Non-GAAP supplemental materials $ in millions (except EPS which is in whole dollars) The above reconciles the non-GAAP financial information contained in the “Revenue and P&L highlights”, “Expense summary” and “Prepared remarks” discussions in the company’s earnings presentation. See Exhibit 99.2 included in the company’s Form 8-K dated April 19, 2023, for additional information on the use of these Non-GAAP financial measures. Reconciliation of continuing operations - 1Q 2023 GAAP Acquisition-related adjustments Retirement-related adjustments Tax reform impacts Kyndryl-related impact Operating (non-GAAP) Gross profit $7,509 $148 — — — $7,658 Gross profit margin 52.7% 1.0 pts — — — 53.7% SG&A 4,853 (246) — — — 4,607 Other (income) & expense (245) (2) 5 — — (242) Total expense 6,451 (247) 5 — — 6,209 Pre-tax income 1,058 396 (5) — — 1,449 Pre-tax income margin 7.4% 2.8 pts (0.0 pts) — — 10.2% Tax rate 11.7% 3.1 pts (0.7 pts) (0.3 pts) — 13.8% Net income 934 305 5 5 — 1,249 Net income margin 6.6% 2.1 pts 0.0 pts 0.0 pts — 8.8% Earnings per share $1.02 $0.33 $0.01 $0.01 — $1.36 1Q23 |
| 28 Non-GAAP supplemental materials *Excludes effects of certain acquisition-related charges, non-operating retirement-related cost/(income), and Kyndryl related impacts. For details on these adjustments, see slide entitled “Reconciliation of continued operations – 1Q 2023” in this presentation. ** Workforce rebalancing actions to address remaining stranded costs from portfolio actions. The above reconciles the non-GAAP financial information contained in the “Financial highlights”, “Revenue and P&L highlights”, and “Prepared remarks” discussions in the company’s earnings presentation. See Exhibit 99.2 included in the company’s Form 8-K dated April 19, 2023, for additional information on the use of these Non-GAAP financial measures. Reconciliation of Pre-tax income and margin – 1Q 2023 1Q23 Yr/Yr 1Q23 Yr/Yr Pre-tax income B/(W) Pre-tax margin B/(W) GAAP 70% 3 pts Non-operating adjustments * (74 pts) (3.5 pts) Operating (non-GAAP) (4%) (0.5 pts) Adjusted to exclude workforce rebalancing charges** 17 pts 1.8 pts Operating (non-GAAP), excl. impact of workforce rebalancing 12% 1.3 pts |
| 29 Non-GAAP supplemental materials *Yr/Yr reflects a one-time non-cash pension settlement charge of $5.9 billion in 2022. The above reconciles the non-GAAP financial information contained in the “Prepared remarks” discussion in the company’s earnings presentation. See Exhibit 99.2 included in the company’s Form 8-K dated April 19, 2023, for additional information on the use of these Non-GAAP financial measures. Reconciliation of Pre-tax margin – FY 2023 expectations GAAP Operating (non-GAAP) B/(W) B/(W) Pre-tax Income Margin Yr/Yr 12 pts 0.5 pts ~ * ~ |
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