IBM reports $19.15 billion Q3 revenue; earnings almost flat

IBM reported third quarter revenues of $19.15 billion, operating pre-tax income of $3.6 billion, and operating earnings per share of $3.30. IBM said its revenue trajectory improved, although revenue was roughly flat year-to-year, gaining from currency fluctuations.

Gross and pre-tax margins improved sequentially, and IBM said free cash flow performance improved, adding that it expect at least $13.80 of operating EPS for 2017, and free cash flow consistent with last year.

IBM said it expects free cash flow (FCF) to be "relatively flat" compared with a 2016 level of $11.6 billion.

In the third quarter, the company generated net cash from operating activities of $3.6 billion, or $3.3 billion excluding global financing receivables. IBM's free cash flow was $2.5 billion. IBM returned $1.4 billion in dividends and $0.9 billion of gross share repurchases to shareholders. At the end of September 2017, IBM had $1.5 billion remaining in the current share repurchase authorization.

IBM ended the third quarter of 2017 with $11.5 billion of cash on hand. Debt totaled $45.6 billion, including global finance.

IBM's Cognitive Solutions segment, which contains a big portion of its software operations, saw revenue rise 3.9 per cent to $4.4 billion. Within the segment, Solutions Software revenue (databases, analytics tools, security software, etc.) grew 4 per cent after having dropped 1 per cent in Q2, and Transaction Processing revenue (mainframe software such as application servers and databases) grew 4 per cent after having dropped 5b per cent in Q2.

Strong security and analytics software demand, including for cloud-based analytics apps and tools, helped IBM's cause. So did healthy demand for IoT offerings (nearly 40 clients were signed for the Watson IoT Platform). At the same time, Schroeter cautioned IBM isn't "counting on continued strong growth" in Transaction Processing.

"During the first three quarters of the year, our strong free cash flow has enabled us to maintain our R&D investments and to expand IBM's cloud and cognitive capabilities through capital investments," said Martin Schroeter, IBM senior vice president and chief financial officer. "In addition, we have returned nearly $8 billion to shareholders through dividends and share repurchases."

Third-quarter cloud revenues increased 20 per cent to $4.1 billion. Cloud revenue over the last 12 months was $15.8 billion, including $8.8 billion delivered as-a-service and $7.0 billion for hardware, software and services to enable IBM clients to implement comprehensive cloud solutions.

The annual exit run rate for as-a-service revenue increased to $9.4 billion from $7.5 billion in the third quarter of 2016. In the quarter, revenues from analytics increased 5 per cent.

Revenues from mobile increased 7 per cent and revenues from security increased 51 per cent (up 49 per cent adjusting for currency).

The company continues to expect operating (non-GAAP) diluted earnings per share of at least $13.80 and GAAP diluted earnings per share of at least $11.95. Operating (non-GAAP) diluted earnings per share exclude $1.85 per share of charges for amortization of purchased intangible assets, other acquisition-related charges and retirement-related charges. IBM continues to expect free cash flow to be relatively flat year to year.