News Column

IBM Reports Q3 Earnings of $3.8 Billion

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IBM (NYSE: IBM) today announced third-quarter 2012 diluted earnings of $3.33 per share, a year-to-year increase of 4 percent, or $3.44 per share, up 8 percent excluding the impact of UK pension-related charges. Operating (non-GAAP) diluted earnings were $3.62 per share, compared with operating diluted earnings of $3.28 per share in the third quarter of 2011, an increase of 10 percent.

Third-quarter net income was $3.8 billion, flat year-to-year; or $3.9 billion, up 3 percent excluding the impact of UK pension-related charges. Operating (non-GAAP) net income was $4.2 billion compared with $4.0 billion in the third quarter of 2011, an increase of 5 percent.

Total revenues for the third quarter of 2012 of $24.7 billion were down 5 percent (down 2 percent, adjusting for currency) from the third quarter of 2011. Currency negatively impacted revenue growth by nearly $1 billion.

"In the third quarter, we continued to drive margin, profit and earnings growth through our focus on higher-value businesses, strategic growth initiatives and productivity," said Ginni Rometty, IBM chairman, president and chief executive officer.

"Looking ahead, we see good opportunity with a strong product lineup heading into this quarter and annuity businesses that provide a solid base of revenue, profit and cash. We are reiterating our full-year 2012 operating earnings per share expectation of at least $15.10."

Third-Quarter GAAP -- Operating (non-GAAP) Reconciliation

Third-quarter operating (non-GAAP) diluted earnings exclude $0.29 per share of charges: $0.12 per share for the amortization of purchased intangible assets and other acquisition-related charges, and $0.17 per share for retirement-related charges, including $0.11 per share for the impact of UK pension-related charges.

Full-Year 2012 Expectations

IBM is adjusting its expectation for full-year 2012 GAAP diluted earnings per share to at least $14.29, to reflect the impact of UK pension-related charges. Operating (non-GAAP) diluted earnings per share expectations remain at least $15.10. The 2012 operating (non-GAAP) earnings expectations exclude $0.81 per share of charges for amortization of purchased intangible assets, other acquisition-related charges, and retirement-related charges.

Geographic Regions

The Americas' third-quarter revenues were $10.4 billion, a decrease of 4 percent (down 3 percent, adjusting for currency) from the 2011 period. Revenues from Europe/Middle East/Africa were $7.2 billion, down 9 percent (down 1 percent, adjusting for currency). Asia-Pacific revenues increased 1 percent (up 2 percent, adjusting for currency) to $6.5 billion. OEM revenues were $538 million, down 28 percent compared with the 2011 third quarter.

Growth Markets

Revenues from the company's growth markets decreased 1 percent (up 4 percent, adjusting for currency) and 35 countries had double-digit revenue growth, adjusting for currency. Revenues in the BRIC countries ” Brazil, Russia,India and China ” increased 4 percent (up 11 percent, adjusting for currency).

Services

Global Technology Services segment revenues decreased 4 percent (up 1 percent, adjusting for currency) to $9.9 billion. Global Business Services segment revenues were down 6 percent (down 3 percent, adjusting for currency) to $4.5 billion.

Pre-tax income from Global Technology Services was flat and pre-tax margin increased to 16.6 percent (up 9 percent and 18.1 percent, respectively, when adjusted for workforce rebalancing charges in the third quarters of 2011 and 2012). Global Business Services pre-tax income decreased 5 percent and pre-tax margin increased to 15.6 percent (up 9 percent and 18 percent, respectively, when adjusted for workforce rebalancing charges in the third quarters of 2011 and 2012).

The estimated services backlog at September 30 was $138 billion, up 1 percent year over year at actual rates (up 1 percent, adjusting for currency).

Software

Revenues from the Software segment were $5.8 billion, down 1 percent (up 3 percent, adjusting for currency) compared with the third quarter of 2011. Software pre-tax income increased 6 percent and pre-tax margin increased to 35.6 percent (up 10 percent and 37.1 percent, respectively, when adjusted for workforce rebalancing charges in the third quarters of 2011 and 2012).

Revenues from IBM's key middleware products, which include WebSphere, Information Management, Tivoli, Lotus and Rational products, were $3.6 billion, down 1 percent (up 3 percent, adjusting for currency) versus the third quarter of 2011. Operating systems revenues of $597 million were flat (up 4 percent, adjusting for currency) compared with the prior-year quarter.

Revenues from the WebSphere family of software products increased 2 percent year over year. Information Management software revenues decreased 1 percent. Revenues from Tivoli software increased 5 percent. Revenues from Lotus software decreased 10 percent, and Rational software decreased 16 percent.

Hardware

Revenues from the Systems and Technology segment totaled $3.9 billion for the quarter, down 13 percent (down 12 percent, adjusting for currency) from the third quarter of 2011. Excluding Retail Store Solutions (RSS), revenues were down 11 percent (9 percent, adjusting for currency). Systems and Technology pre-tax income decreased $0.2 billion.

Total systems revenues, excluding RSS, decreased 8 percent (down 6 percent, adjusting for currency). Revenues from Power Systems were down 2 percent compared with the 2011 period. Revenues from System x were down 5 percent. Revenues from System z mainframe server products decreased 20 percent compared with the year-ago period. Total delivery of System z computing power, as measured in MIPS (millions of instructions per second), decreased 2 percent. Revenues from System Storage decreased 10 percent. Revenues from Retail Store Solutions decreased 79 percent year over year as a result of the divestiture in the quarter. Revenues from Microelectronics OEM decreased 25 percent.

Financing

Global Financing segment revenues were down 9 percent (down 5 percent, adjusting for currency) in the third quarter at $472 million. Pre-tax income for the segment decreased 1 percent to $476 million.

Gross Profit

The company's total gross profit margin was 47.4 percent in the 2012 third quarter compared with 46.5 percent in the 2011 third-quarter period. Total operating (non-GAAP) gross profit margin was 48.1 percent in the 2012 third quarter compared with 46.8 percent in the 2011 third-quarter period, with increases in Global Technology Services and Global Business Services.

Expense

Total expense and other income decreased 7 percent to $6.7 billion, or a decrease of 9 percent to $6.5 billion, excluding $162 million for UK pension-related charges, compared with the prior-year period. S,G&A expense of $5.9 billion increased 4 percent year over year, or expense of $5.7 billion, up 1 percent excluding the impact of UK pension-related charges. S,G&A expense includes $408 million for workforce rebalancing, which negatively impacted net income by approximately $310 million. R,D&E expense of $1.5 billion decreased 1 percent compared with the year-ago period. Intellectual property and custom development income increased to $303 million compared with $298 million a year ago. Other (income) and expense was income of $606 million compared with prior-year expense of $128 million. This increase in income was primarily due to a $447 million gain from the divestiture of Retail Store Solutions, which contributed approximately $280 million to net income. Interest expense increased to $124 million compared with $107 million in the prior year.

Total operating (non-GAAP) expense and other income decreased 10 percent to $6.4 billion compared with the prior-year period. Operating (non-GAAP) S,G&A expense of $5.6 billion increased 1 percent compared with prior-year expense. Operating (non-GAAP) R,D&E expense of $1.5 billion decreased 2 percent compared with the year-ago period.

***

Pre-tax income increased 1 percent to $5.1 billion, or 4 percent to $5.2 billion excluding the impact of UK pension-related charges. Pre-tax margin increased 1.3 points to 20.5 percent, or 1.9 points to 21.2 percent excluding the impact of UK pension-related charges, compared with the prior-year period. Operating (non-GAAP) pre-tax income increased 7 percent to $5.5 billion and pre-tax margin was 22.3 percent, up 2.5 points.

IBM's tax rate was 24.6 percent, up 1.0 points year over year; operating (non-GAAP) tax rate was 24.7 percent, up 1.1 points compared to the year-ago period.

Net income margin increased 0.8 points to 15.5 percent, or 1.3 points to 16.0 percent excluding the impact of UK pension-related charges. Total operating (non-GAAP) net income margin increased 1.7 points to 16.8 percent.

The weighted-average number of diluted common shares outstanding in the third-quarter 2012 was 1.15 billion compared with 1.20 billion shares in the same period of 2011. As of September 30, 2012, there were 1.13 billion basic common shares outstanding.

Debt, including Global Financing, totaled $33.7 billion, compared with $31.3 billion at year-end 2011. From a management segment view, Global Financing debt totaled $23.3 billion versus $23.3 billion at year-end 2011, resulting in a debt-to-equity ratio of 7.1 to 1. Non-global financing debt totaled $10.3 billion, an increase of $2.4 billion since year-end 2011, resulting in a debt-to-capitalization ratio of 36.0 percent from 32.0 percent.

IBM ended the third-quarter 2012 with $12.3 billion of cash on hand and generated free cash flow of $3.1 billion, excluding Global Financing receivables, down approximately $0.3 billion year over year. The company returned $4.0 billion to shareholders through $1.0 billion in dividends and $3.0 billion of share repurchases. The balance sheet remains strong, and the company is well positioned to support the business over the long term.

Year-To-Date 2012 Results

Net income for the nine months ended September 30, 2012 was $10.8 billion, a year-to-year increase of 4 percent, or $10.9 billion, up 5 percent, excluding the impact of UK pension-related charges. Diluted earnings per share were $9.27 compared with $8.48 per diluted share for the 2011 period, an increase of 9 percent, or $9.38, up 11 percent excluding the impact of UK pension-related charges. Revenues for the nine-month period totaled $75.2 billion, a decrease of 3 percent (flat, adjusting for currency) compared with $77.4 billion for the nine months of 2011.

Operating (non-GAAP) net income for the nine months ended September 30, 2012 was $11.5 billion compared with $10.7 billion in the year-ago period, an increase of 7 percent. Operating (non-GAAP) diluted earnings per share were $9.90 compared with $8.77 per diluted share for the 2011 period, an increase of 13 percent.

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 the following: a downturn in economic environment and corporate IT spending budgets; the company's failure to meet growth and productivity objectives, a failure of the company's innovation initiatives; 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; cybersecurity and data privacy considerations; fluctuations in financial results and purchases, impact of local legal, economic, political and health conditions; adverse effects from environmental matters, tax matters and the company's pension plans; ineffective internal controls; the company's use of accounting estimates; the company's ability to attract and retain key personnel and its reliance on critical skills; impacts of relationships with critical suppliers and business with government clients; currency fluctuations and customer financing risks; impact of changes in market liquidity conditions and customer credit risk on receivables; reliance on third party distribution channels; the company's ability to successfully manage acquisitions and alliances; risk factors related to IBM securities; and other risks, uncertainties and factors discussed in the company's Form10-Q, Form10-K and in the company's other filings with the U.S. Securities and Exchange Commission (SEC) 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. 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 and expectations --

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

presenting non-global financing debt-to-capitalization ratio;

adjusting for free cash flow;

adjusting for currency (i.e., at constant currency);

adjusting for workforce rebalancing charges.

The rationale for management's use of non-GAAP measures is included as part of the supplemental materials presented within the third-quarter earnings materials. These materials are available on the IBM investor relations Web site at www.ibm.com/investor and are being included in Attachment II ("Non-GAAP Supplemental Materials") to the Form8-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 4:30p.m. EDT, today. The Webcast may be viewed at www.ibm.com/investor/3q12. Presentation charts will be available on the Web site shortly before the Webcast.