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IBM’s First-Quarter Earnings and Revenue Top Estimates

IBM is “confident” it can achieve full-year revenue growth, said CEO Arvind Krishna.

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IBM posted better-than-expected first-quarter financial results and reiterated its forecast that 2021 revenue will be up from 2020.

Shares of IBM (ticker: IBM) were up 4.5%, to $138.92, in after-hours trading.

For the quarter, the enterprise computing giant posted revenue of $17.7 billion, up 1%, but down 2% on a constant currency basis, and ahead of the Street at $17.3 billion. Non-GAAP profits were $1.77 a share, ahead of the Street consensus forecast of $1.63 a share. That compares to revenue of $17.6 billion and a non-GAAP profit of $1.84 a share in the year-ago quarter. On a GAAP basis, the company earned $1.06 a share, down from $1.31 a share a year ago.

“Strong performance this quarter in cloud, driven by increasing client adoption of our hybrid cloud platform, and growth in software and consulting enabled us to get off to a solid start for the year,” CEO Arvind Krishna said in a statement. “While we have more work to do, we are confident we can achieve full-year revenue growth and meet our adjusted free cash flow target in 2021.”

The company said revenue in its cloud and cognitive-software segment was $5.4 billion, up 3.8%, or 0.8% adjusting for currency. Global Business Services segment revenue was $4.2 billion, up 2.4%, but down 1.4% adjusted for currency. 

Global Technology Services revenue was $6.4 billion, down 1.5%, or 5.3% adjusted for currency. Systems revenue, which includes hardware, was $1.4 billion, up 4.3%, or 2.2% on a currency adjusted basis. Global Financing revenue was $240 million, down 20%, or 21.9% adjusted for currency.

Total cloud revenue was $6.5 billion, up 21%, or 18% adjusted for currency and divested businesses. Red Hat revenue was up 17%, or 15% adjusted for currency.

First-quarter gross margin was 47.3% on a non-GAAP basis, up 110 basis points, or 46.3% on a GAAP basis, up 120 basis points.

IBM said it has paid down $5.1 billion in debt since the end of 2020, reducing total debt to $56.4 billion. IBM has paid down $16.6 billion in debt since closing the Red Hat acquisition in 2019.

IBM repeated its previous forecast for full-year 2021 adjusted free cash flow of $11 billion to $12 billion, with revenue ahead of 2020 levels. The company continues to expect sustainable mid-single-digit growth once it completes the pending spin of Kyndryl, its managed services business. The company didn’t provide any new details on the spin, but continues to expect the transaction to be completed by the end of 2021.

CFO James Kavanaugh noted in an interview with Barron’s that revenue in the quarter was about $400 million higher than Street expectations, with broad-based strength across hardware, software and services. He pointed out notes that revenue from the company’s cloud businesses was $26 billion over the last 12 months, and now accounts for more than a third of IBM’s business.

Kavanaugh said IBM expects to submit a Form 10 filing with the Securities and Exchange Commission in mid- to late summer detailing the post-spin income statements and balance sheets on a pro forma basis for both Kyndryl and “remainco.” He expects the first earnings quarter for Kyndryl as an independent company in the 2022 first quarter. He said he expects Kyndryl to target an investment-grade rating, with an “attractive” dividend and free-cash flow yield.

Asked about the tone of business given widespread expectations that enterprise IT spending is recovering, Kavanaugh said that “overall we are encouraged by the trends we are seeing from a macroeconomic perspective,” although he noted that “trends are not homogeneous around the world.” He said there is a correlation between pandemic curves in various markets and client buying behavior. “We are cautiously optimistic,” he said. 

Write to Eric J. Savitz at [email protected]

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