IBM reported after the market closed on January 21, 2021, it earned $1.51 per diluted share in the quarter that ended on December 31, 2020, down 63 percent from earnings of $4.11 in the same 3 months of the previous year. These figures are the earnings determined in accordance with U.S. Generally Accepted Accounting Principles (GAAP).
Operating Earnings from Continuing Operations, a non-GAAP figure, fell 56 percent to $2.07 per share from $4.71 one year earlier, a decline not quite as steep as change than seen in the GAAP figures. The principal exclusions contributing to the $0.56 per share difference in the latest quarter between the GAAP and Non-GAAP earnings were: Acquisition-Related Adjustments [$0.40 per share], Retirement-Related Adjustments [$0.22 per share], and Other [$0.04 per share]. Non-GAAP earnings, by excluding unusual and non-cash items that could obscure the results of a business's principal, ongoing operations, are intended to be cleaner measures of corporate profits.
This post compares the quarterly Income Statement published by IBM to the estimates I made in a previous “Look Ahead” post. My estimates were based on publicly available guidance provided by IBM's management to financial analysts, news reports, and trends in the company's historical results. Unless otherwise mentioned, all reported values mentioned below are GAAP figures.
First, a little background about the company: IBM was the first giant computer company, and it was once one of the largest companies in the world. When hardware became a commodity product, IBM increased its focus on more-profitable information technology services for businesses. Always a research powerhouse, the company subsequently developed cloud-computing and artificial intelligence services (e.g., "Deep Blue"), but IBM's annual revenue has been slowly declining for years. IBM started to recreate itself in a more radical way in 2019 by acquiring Red Hat, a leading open-source software firm, for $34 billion. The next step came when IBM announced in October 2020 it would spin off its managed infrastructure services unit, into a separate company. This business is currently part of the Global Technology Services division, and it brings in revenue of about $19 billion per year.
Revenue in the December 2020 quarter totaled $20.4 billion, 6 percent less than last year's $21.8 billion. The Global Technology Services business was responsible for 32 percent of overall revenue, and this unit's revenue percent fell by 5.5 percent compared to the year-earlier result. The Cloud & Cognitive Software business contributed 34 percent of revenue, and this unit's revenue decreased by 4.5 percent. The Global Business Services unit supplied 20 percent of revenue, and this business's revenue fell by 2.7 percent.
I was expecting IBM to report revenue of $20.2 billion for the December 2020 quarter. The actual amount surpassed my estimate by $167.0 million (0.8 percent).
The Cost of Revenue (also known as Cost of Goods Sold) was $9.8 billion in the latest quarter, which translates into a Gross Margin of 51.7 percent of revenue. Since it was higher than the 51.0 percent Gross Margin achieved in the year-earlier quarter, it signifies that IBM sold its products and services at more profitable prices relative to production costs. I was expecting the Gross Margin to be 48.5 percent in the December 2020 quarter, and IBM exceeded that prediction by 3.2 percent.
IBM spent $1.61 billion on Research and Development in the latest quarter, up from $1.60 billion one year ago. I had estimated that R&D expenses would be $1.62 billion. R&D was 7.9 percent of Revenue.
Sales, General, and Administrative expenses totaled $7.2 billion in the December 2020 quarter, up from $5.4 billion one year ago. SG&A expenses increased from 24.9 percent to 35.5 percent of quarterly revenue, and the big increase is due to a ~$2.0 billion charge for restructuring.
The last operating expense line on the Income Statement is for all other operating income and expenses. This line amounted to a $173.0 million gain in the latest quarter. I had assumed the restructuring charge, originally expected to be $2.3 billion, would be listed here and not as part of SG&A.
Operating Income was $1.9 billion in the quarter, down 56.2 percent from the year-earlier period. Operating Income exceeded my $0.4 billion estimate by $1.4 billion. The better-than-expected Gross Margin and the less-than-expected restructuring charge accounted for much of the difference between the actual result and my prediction.
Interest and other non-operating items summed to a net expense of $564 million. My estimate was $525.0 million.
The effective income tax rate fell by 6.2 percent to 1.9 percent, which had a positive effect on net income. I expected the tax rate to be 10.2 percent.
Net income in the quarter was $1.4 billion, $1.51 per share. The figures for the year-earlier quarter were $3.7 billion, $4.11/share. My EPS estimate was ($0.10).
In summary, IBM greatly exceeded my prediction by increasing its gross margin, incurring a lower-than-expected restructuring expense, and (somehow) having an income tax rate close to zero.
The Cash Flow Statement for the quarter shows that IBM's operating activities generated $5.9 billion in cash during the last quarter, up 69.8 percent from $3.5 billion in the year-earlier period. The cash flow delta was, therefore, much better than the change in earnings. Notable uses for cash included $1.5 billion to pay dividends to shareholders, $299 million for corporate acquisitions, and $1.1 billion to acquire property, plant and capital equipment.
Free cash flow over the last 12 months totaled $15.2 billion, or $16.86 per share using the latest share count. At the current market price per share of $118.60, this translates into a very attractive Free Cash Flow Yield of 14.2 percent.
This post is not investment advice, and the accuracy of the information, tables, charts, and any commentary presented is not guaranteed. Readers are encouraged to independently verify all data using information from original sources. The Income Statements discussed in these blog posts have not been audited and may differ in material respects from those published by the subject company. These differences are intended to facilitate analysis and cross-company comparisons. Complete financial statements with notes can usually be found in the 10-Q and 10-K filings companies submit to the Securities and Exchange Commission (SEC).
#ibm #gauges #gcfr #gcfr2 #QtrlyRpt #nac_financialanalysis
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