This article is the last in a series IBM is posting to help investors understand its historical profile and reporting implications following the separation of Kyndryl. The purpose of this article is to provide stakeholders with a view of its historical financials which reflect both the separation of Kyndryl as well as the changes to IBM’s management structure and segment reporting. Investors and analysts now have the information needed to:
As a result of the separation, Kyndryl’s historical operational activity has been reclassified to IBM’s discontinued operations results, in accordance with the requirements of U.S. Generally Accepted Accounting Principles (GAAP). As such, IBM is now providing recast historical results on a continuing operations and discontinued operations basis. IBM’s future reporting will focus on continuing operations and the company will continue to provide an operating (non-GAAP) view of its results.
As a reminder, discontinued operations do not include historical intercompany transactions between IBM and Kyndryl (e.g., purchases of IBM hardware and software) which were previously eliminated in consolidation. It also does not include the spending for shared services (e.g., finance, marketing, human resources, global sales coverage) that was transferred to Kyndryl upon separation. Therefore, IBM’s historical recast of continuing operations, in total and at the segment level, through October 2021 does not represent its go-forward continuing operations profile.
To provide additional transparency to investors, IBM previously provided a baseline of its 2020 post-separation revenue, operating (non-GAAP) net income, and free cash flow, which it believes is a more representative view of its go-forward business. This view is re-attached below and has not changed from when it was published on November 4 (see Exhibit 1).
To understand the expected impact to IBM’s fourth quarter 2021 financial results, investors should familiarize themselves with the content provided in October and November of this year.
The cumulative impact of these two items aligns fourth quarter expectations to IBM’s continuing operations basis.
The separation of Kyndryl was an important step in advancing IBM’s platform-centric approach to capturing the hybrid cloud and AI opportunity. To further align its operating model with this approach, IBM announced on October 4 it was implementing a simplified and streamlined management structure effective immediately preceding the separation.
IBM’s new segment reporting reflects this management structure, with four reportable segments: Software, Consulting, Infrastructure, and Financing (see Exhibits 2 and 3). The company will report segment revenue, gross profit, and pre-tax income for each segment. Additionally, consistent with IBM’s continuing operations reporting basis, segments do not include inter-company revenue or material profit.
This historical information together with the information IBM provided in its October 4 investor briefing, which detailed its mid-term model of mid-single digit revenue and high-single digit free cash flow growth, enables investors to update their forward-looking financial models (see Exhibits 4 and 5).
The company will report under a continuing operations basis with the new structure starting with its fourth quarter 2021 results, which it expects to announce on January 24, 2022. At this time, it will also provide further information on its 2022 outlook (see Exhibit 6).
Additional information about IBM can be found on its investor website at www.ibm.com/investor.
Exhibits 7a-7d included in the PDF of this article
Exhibit 7a: IBM Consolidated (GAAP) Results as Historically Reported
Exhibit 7b: IBM Consolidated (GAAP) Results as Adjusted for Discontinued Operations
Exhibit 7c: IBM Operating (non-GAAP) Results as Adjusted for Discontinued Operations
Exhibit 7d: IBM Segment Revenue & Gross Profit Adjusted for Segment Changes
Except for the historical information and discussions contained herein, certain statements made in this investor relations article may be characterized as forward looking under 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. Those statements by their nature address matters that are uncertain to different degrees and involve a number of factors that could cause actual results to differ materially. Additional information concerning these factors is contained in the company’s filings with the SEC. Copies are available from the SEC, from the IBM web site, or from IBM Investor Relations. Any forward-looking statement made speaks only as of the date on which it is made. Except as required by law, the company assumes no obligation to update or revise any forward-looking statements. This article, the below-mentioned rationale for management’s use of non-GAAP metrics and the below-mentioned reconciliations are integrally related and are intended to be presented and understood together.
In an effort to provide better transparency into IBM’s operational results and forward-looking financial information on a continuing operations basis, as determined by generally accepted accounting principles (GAAP), these materials contain non-GAAP financial measures, including “operating” earnings, free cash flow, as well as a post-separation modeled free cash flow estimate and pro forma earnings.
The rationale for management’s use of non-GAAP information and a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures are included in Exhibit 99.2 to the company’s Form 8-K furnished with the SEC on December 27, 2021.