Actionable news
All posts from Actionable news

Results of Operations and Financial

Attachment I of this Form8-K contains the prepared remarks for IBMs Chief Financial Officer Martin Schroeters third quarter earnings presentation to investors on October19, 2015. Certain reconciliation and other information (Non-GAAP Supplemental Materials) for this presentation was included in Attachment II to the Form8-K that IBM submitted on October19, 2015, which included IBMs press release dated October19, 2015. Attachment II of this Form 8-K contains the Consolidated Statement of Financial Position from IBMs press release dated October 19, 2015 that corrects a typographical error in the Retained Earnings line. All of the information in Attachment I and Attachment II is hereby filed.

IBMs web site ( contains a significant amount of information ab out IBM, including financial and other information for investors ( IBM encourages investors to visit its various web sites from time to time, as information is updated and new information is posted.


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.


/s/ Stanley J. Sutula III

Stanley J. Sutula III

Vice President and Controller


Thank you. This is Patricia Murphy, Vice President of Investor Relations for IBM. Im here today with Martin Schroeter,IBMs Senior Vice President and Chief Financial Officer. I want to welcome you to our third quarter earnings presentation.

The prepared remarks will be available within a couple of hours, and a replay of the webcast will be posted by this time tomorrow.

Ill remind you that certain comments made in this presentation may be characterized as forward looking under the Private Securities Litigation Reform Act of 1995. Those statements involve a number of factors that could cause actual results to differ materially. Additional information concerning these factors is contained in the companys filings with the SEC. Copies are available from the SEC, from the IBM web site, or from us in Investor Relations.

Our presentation also includes certain non-GAAP financial measures, in an effort to provide additional information to investors. All non-GAAP measures have been reconciled to their related GAAP measures in accordance with SEC rules. You will find reconciliation charts at the end of the presentation, and in the Form8-K submitted to the SEC. Now,Ill turn the call over to Martin Schroeter.


3Q Overview

Thanks Patricia.

For some time weve been talking about the tremendous changes in our industry, as our clients move to new areas, get greater value from their data and IT environments, and implement new business models. So as we transform our business, we invest where we see higher value over the longer term. We drive growth in the areas where were investing, while other areas decline as we shift the business. And we expect to expand margins in our move to higher value. This is how we transform from one era to the next.

Our third quarter results reflect the progress were making in that transformation. We continued strong growth in our strategic imperatives. We expanded gross and net margins. We generated substantial free cash flow, and we continued a high level of investment, while returning value to shareholders.

We always said this would play out over time, though this quarter we fell a little short of the revenue expectations we set for ourselves. The GBS transformation is taking longer as the market shifts away from some of the more traditional application areas, and our storage disk business was weaker, as more of the demand moves to our flash. And while our software performance for the quarter was consistent with what weve seen all year, we did have some weakness in transactions at the end of the quarter. In addition, our revenue trajectory continues to reflect significant impacts from currency movements, and our divested businesses, in fact over 12 points of growth in total.

Put it all together, and the progress were making demonstrates that were on the right strategy as we help our clients move their businesses to the future. We see a lot of opportunity, and with this momentum in strategic imperatives, were going to continue to invest at a very high level, to accelerate the shift in our business. At the same time, we considered the pace of the GBS progress, and applied the trajectory in transactions we saw at the end of the quarter to the larger fourth quarter transaction base, which reduces our view of the year. Taking all of this into consideration, we believe it is prudent to update our expectations for full year operating earnings per share to $14.75 to $15.75, while our view of free cash flow


remains relatively flat year to year. Ill come back to this after going through the results of the quarter.

Let me start by providing a little more color on the strategic imperatives performance. Our revenue in cloud, analytics, social, mobile, and security was up 27 percent in the third quarter, which puts us up over 30 percent year to date. This is without the impact of currency and divestitures and throughout this presentation Ill focus on that view. Our cloud revenue was up over 65 percent through three quarters, with strong year-to-year performance across both our private foundations revenue and our as-a-Service offerings. Over the last 12 months our cloud revenue was $9.4 billion and we exited the third quarter with an annual as-a-Service run rate of four and a half billion dollars. Analytics revenue is up nearly 20 percent year to date and in the area of engagement, the revenue from these businesses nearly doubled over last year. Our security business was up 12 percent, social up about 40 percent, and our mobile business quadrupled.

Looking at the transformation or shift to strategic imperatives from a segment perspective, in Global Technology Services, were bringing in more cloud, mobility and security to infrastructure services, both to new clients, and to help existing clients move to the future. Our GTS results reflect growth in revenue, and in the backlog. And when you look at high-end servers, weve repositioned the portfolio and delivered innovation as these systems run the most contemporary workloads. Throughout this year, weve had strong growth in our z Systems, and continued success in Power. These are just two examples of what that shift looks like.

Were continuing to invest and add capabilities to accelerate this shift, and in the last 90 days weve committed more capital, including the acquisitions of Merge Healthcare to give Watson the ability to see millions of medical images, along with Cleversafe, Compose, StrongLoop and Meteorix, each bolstering our Cloud capabilities. We also just launched the industrys first consulting practice dedicated to cognitive business. These actions all advance our transformation of the IBM Company.

Our approach is to integrate acquired content with our own organic capabilities, and leverage partnerships and a broader ecosystem to build new high value platforms, like Watson, SoftLayer, Bluemix, and OpenPOWER. Last quarter I


talked about the creation of Watson Health, which incorporated our Watson capabilities, the acquisitions of Phytel and Explorys, partnerships with leading healthcare companies, and the creation of a HIPPA-compliant cloud. Weve continued to announce new partnerships, and new cloud services. The acquisition of Merge Healthcare brings together Watsons advanced analytics and cognitive capabilities with data and images from Merges medical imaging platform to help doctors make sense of one patients medical images in the context of the mass of related images.

We are creating similar platforms for other industries and areas, such as Internet of Things. For example, we are working with a major global airline on how to apply cognitive thinking to understand all the variables impacting fuel demands of any given flight. They are looking at structured and unstructured data including predicted taxi time, weather conditions, air traffic control delays, and inflight mechanical issues, so as to optimize fuel load.

And we are working with a European hospitality company on how to apply cognitive thinking to understand how to maximize revenue from new high-end kiosk-based coffee shops. They are looking at structured data, such as frequency and timing of credit card purchases, combined with unstructured data including social chatter on Twitter and real-time weather. They use Watson cognitive APIs to make sense of this data. This requires a platform approach that integrates industry expertise, analytics software, cognitive APIs, Cloud, Bluemix and multiple data streams- very powerful.

As I said earlier, this is a longer-term play. Were creating new platforms, and building ecosystems, and much of this is an as-a-Services model. Were continuing to invest at a high level, as we shift our spending to our strategic imperatives.


Key Financial Metrics

Let me now turn to the financial metrics for the quarter. Our revenue of $19.3 billion was down 1 percent, reflecting the transition weve been describing.

We expanded gross margin, driven by our portfolio actions and the relative strength of z Systems revenue, in other words, driven by our shift to higher value. As we said last quarter, our PTI trajectory in the third quarter would be similar to the second, reflecting continued high level of investments across the business and currency impacts. And our PTI margin was flat year-to-year. Our ongoing effective tax rate remains at 20 percent, while the third quarter rate reflects discrete period items. And so bottom line we delivered $3.34 of operating earnings per share.

We generated over two and a half billion dollars of free cash flow in the quarter, and over the last 12 months, weve generated $13.6 billion of free cash flow, with realization of GAAP net income over 90 percent. Over that same period we reduced our share count by two percent, and increased our dividend, returning about two-thirds of our free cash flow to shareholders.


Revenue by Geography

Now turning to the revenue by geography, our performance varied across the major markets. Our US revenue was down four percent. A decline in traditional enterprise app implementations is impacting our consulting business, and in the month of Septemberwe had a slowdown in our software transactions. That said, we did have another quarter of strong z Systems performance in the US. By contrast, two of our...