Ad hoc-Mitteilungen

IBM Reports 2020 Second-Quarter Results

ARMONK, N.Y. --(BUSINESS WIRE)-- IBM (NYSE: IBM) today announced second-quarter 2020 earnings results.

“Our clients see the value of IBM’s hybrid cloud platform, based on open technologies, at a time of unprecedented business disruption," said Arvind Krishna, IBM chief executive officer. "We are committed to building, with a growing ecosystem of partners, an enduring hybrid cloud platform that will serve as a powerful catalyst for innovation for our clients and the world.”

Highlights for the second quarter include:

  • GAAP EPS from continuing operations of $1.52
  • Operating (non-GAAP) EPS of $2.18
  • Revenue of $18.1 billion, down 5.4 percent (down 1.9 percent adjusting for divested businesses and currency)

    -- Cloud & Cognitive Software revenue up 3 percent (up 5 percent adjusting for currency)

    -- Systems revenue up 6 percent
  • Total cloud revenue of $6.3 billion, up 30 percent (up 34 percent adjusting for divested businesses and currency)

    -- Total cloud revenue of $23.5 billion over the last 12 months, up 20 percent (up 23 percent adjusting for divested businesses and currency)
  • Red Hat revenue up 17 percent (up 18 percent adjusting for currency), normalized for historical comparability
  • GAAP gross profit margin of 48 percent, up 100 basis points; Operating (non-GAAP) gross profit margin of 49 percent up 160 basis points
  • Net cash from operating activities of $15.1 billion and free cash flow of $11.5 billion, over the last 12 months
SECOND QUARTER 2020

Results Reflect the Impact of Items Related to

the Red Hat Acquisition Closed in July 2019

Pre-tax

Gross

Diluted

Net

Pre-tax

Income

Profit

EPS

Income

Income

Margin

Margin

GAAP from Continuing Operations

$

1.52

$

1.4B

$

1.6B

8.7

%

48.0

%

Year/Year

(46)

(46)

(43)

(5.8)

Pts

1.0

Pts

Operating (Non-GAAP)

$

2.18

$

1.9B

$

2.3B

12.8

%

49.0

%

Year/Year

(31)

(31)

(27)

(3.8)

Pts

1.6

Pts

“Our prudent financial management in these turbulent times enabled us to expand our gross profit margin, generate strong free cash flow and improve our liquidity position," said James Kavanaugh, IBM senior vice president and chief financial officer. "We have the financial flexibility to continue to invest in our business and return value to our shareholders through our dividend policy.”

Cash Flow and Balance Sheet

In the second quarter, the company generated net cash from operating activities of $3.6 billion, or $3.0 billion excluding Global Financing receivables. IBM’s free cash flow was $2.3 billion. The company returned $1.5 billion to shareholders in dividends.

IBM ended the second quarter with $14.3 billion of cash on hand which includes marketable securities, up $5.2 billion from year-end 2019. Debt, including Global Financing debt of $21.9 billion, totaled $64.7 billion.

Segment Results for Second Quarter

Segment results reflect growing adoption of IBM's hybrid cloud platform while clients continue to shift priorities to preserve cash and maintain operational stability.

  • Cloud & Cognitive Software (includes Cloud & Data Platforms which includes Red Hat, Cognitive Applications and Transaction Processing Platforms) — revenues of $5.7 billion, up 3 percent (up 5 percent adjusting for currency), with growth in Cloud & Data Platforms, up 29 percent (up 30 percent adjusting for currency) led by Red Hat. Cognitive Applications and Transaction Processing Platforms declined. Cloud revenue more than doubled.
  • Global Business Services (includes Consulting, Application Management and Global Process Services) — revenues of $3.9 billion, down 7 percent (down 6 percent adjusting for currency), driven by declines in Application Management and Consulting. Cloud revenue up 12 percent (up 13 percent adjusting for currency). Gross profit margin up 240 basis points.
  • Global Technology Services (includes Infrastructure & Cloud Services and Technology Support Services) — revenues of $6.3 billion, down 8 percent (down 5 percent adjusting for currency). Cloud revenue up 18 percent (up 20 percent adjusting for currency).
  • Systems (includes Systems Hardware and Operating Systems Software) — revenues of $1.9 billion, up 6 percent, led by IBM Z, up 69 percent (up 68 percent adjusting for currency). Storage Systems revenue up 2 percent (up 3 percent adjusting for currency); Power declined. Cloud revenue up 22 percent. Gross profit margin up 430 basis points.
  • Global Financing (includes financing and used equipment sales) — revenues of $265 million, down 25 percent (down 23 percent adjusting for currency), reflecting the wind-down of OEM commercial financing. Gross profit margin up 360 basis points.

Year-To-Date 2020 Results

Consolidated diluted earnings per share was $2.83 compared to $4.58, down 38 percent year to year. Consolidated net income was $2.5 billion, down 38 percent year to year. Revenues for the six-month period ended June 30, 2020 totaled $35.7 billion, a decrease of 4 percent year to year (down 1 percent adjusting for divested businesses and currency) compared with $37.3 billion for the first six months of 2019.

Operating (non-GAAP) diluted earnings per share from continuing operations was $4.02 compared with $5.42 per diluted share for the 2019 period, a decrease of 26 percent. Operating (non-GAAP) net income for the six months ended June 30, 2020 was $3.6 billion compared with $4.8 billion in the prior-year period, a decrease of 26 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, but not limited to, the following: a downturn in economic environment and client spending budgets; the company’s failure to meet growth and productivity objectives; a failure of the company’s innovation initiatives; damage to the company’s reputation; 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; impact of local legal, economic, political, health and other conditions; adverse effects from environmental matters, tax matters and the company’s pension plans; ineffective internal controls; the company’s use of accounting estimates; impairment of the company’s goodwill or amortizable intangible assets; the company’s ability to attract and retain key employees and its reliance on critical skills; impacts of relationships with critical suppliers; product quality issues; impacts of 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 and ecosystems; the company’s ability to successfully manage acquisitions, alliances and dispositions, including integration challenges, failure to achieve objectives, the assumption of liabilities, and higher debt levels; legal proceedings and investigatory risks; risk factors related to IBM securities; and other risks, uncertainties and factors discussed in the company’s Form 10‑Qs, Form 10‑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. Except as required by law, 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 —

  • adjusting for currency (i.e., at constant currency);
  • total revenue and cloud revenue adjusting for divested businesses and currency;
  • Red Hat revenue normalized for historical comparability;
  • presenting operating (non-GAAP) earnings per share amounts and related income statement items;
  • adjusting for free cash flow;
  • net cash from operating activities, excluding Global Financing receivables.
The rationale for management’s use of these non-GAAP measures is included in Exhibit 99.2 in the Form 8‑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 5:00 p.m. EDT, today. The Webcast may be accessed via a link at https://www.ibm.com/investor/events/ibm-2q-2020-earnings-announcement. Presentation charts will be available shortly before the Webcast.

Financial Results Below (certain amounts may not add due to use of rounded numbers; percentages presented are calculated from the underlying whole-dollar amounts).

INTERNATIONAL BUSINESS MACHINES CORPORATION

COMPARATIVE FINANCIAL RESULTS

(Unaudited; Dollars in millions except per share amounts)

Three Months Ended

Six Months Ended

June 30,

June 30,

2020

2019

2020

2019

REVENUE

Cloud & Cognitive Software

5,748

5,563

10,987

10,530

Global Business Services

3,890

4,197

8,027

8,353

Global Technology Services

6,316

6,837

12,783

13,711

Systems

1,852

1,753

3,220

3,081

Global Financing

265

351

564

757

Other

50

460

113

911

TOTAL REVENUE

18,123

19,161

35,694

37,342

GROSS PROFIT

8,700

9,010

16,622

17,053

GROSS PROFIT MARGIN

Cloud & Cognitive Software

77.1

77.7

76.3

76.7

Global Business Services

28.4

26.0

27.8

26.1

Global Technology Services

34.2

34.4

34.1

34.1

Systems

57.8

53.5

54.6

50.3

Global Financing

38.6

35.0

39.7

34.9

TOTAL GROSS PROFIT MARGIN

48.0

47.0

46.6

45.7

EXPENSE AND OTHER INCOME

S,G&A

5,248

5,456

11,203

10,147

R,D&E

1,582

1,407

3,207

2,840

Intellectual property and custom development income

(203)

(222)

(319)

(323)

Other (income) and expense

179

(747)

361

(820)

Interest expense

323

348

649

558

TOTAL EXPENSE AND OTHER INCOME

7,129

6,242

15,101

12,402

INCOME FROM CONTINUING OPERATIONS

BEFORE INCOME TAXES

1,571

2,768

1,522

4,651

Pre-tax margin

8.7

14.4

4.3

12.5

Provision for / (Benefit from) income taxes

209

269

(1,017)

558

Effective tax rate

13.3

9.7

(66.8)

12.0

INCOME FROM CONTINUING OPERATIONS

1,362

2,499

2,538

4,093

DISCONTINUED OPERATIONS

Income / (Loss) from discontinued operations, net of taxes

(1)

(1)

(2)

(4)

NET INCOME

1,361

2,498

2,536

4,089

EARNINGS / (LOSS) PER SHARE OF COMMON STOCK

Assuming Dilution

Continuing Operations

1.52

2.81

2.83

4.58

Discontinued Operations

0.00

0.00

0.00

0.00

TOTAL

1.52

2.81

2.83

4.58

Basic

Continuing Operations

1.53

2.82

2.85

4.61

Discontinued Operations

0.00

0.00

0.00

0.00

TOTAL

1.53

2.82

2.85

4.61

WEIGHTED-AVERAGE NUMBER OF COMMON SHARES OUTSTANDING (M’s)

Assuming Dilution

894.9

890.8

895.0

892.4

Basic

889.4

886.3

888.7

887.9

______________________________

* Recast to conform with 2020 presentation.

INTERNATIONAL BUSINESS MACHINES CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEET

(Unaudited)

At

At

June 30,

December 31,

(Dollars in Millions)

2020

2019

ASSETS:

Current Assets:

Cash and cash equivalents

12,041

8,172

Restricted cash

147

141

Marketable securities

2,063

696

Notes and accounts receivable - trade, net

6,543

7,870

Short-term financing receivables, net

11,967

14,192

Other accounts receivable, net

937

1,733

Inventories

1,869

1,619

Deferred costs

2,127

1,896

Prepaid expenses and other current assets

2,260

2,101

Total Current Assets

39,953

38,420

Property, plant and equipment, net

9,709

10,010

Operating right-of-use assets, net

4,774

4,996

Long-term financing receivables, net

7,351

8,712

Prepaid pension assets

7,254

6,865

Deferred costs

2,445

2,472

Deferred taxes

8,689

5,182

Goodwill

57,833

58,222

Intangibles, net

14,270

15,235

Investments and sundry assets

1,921

2,074

Total Assets

$

154,200

$

152,186

LIABILITIES:

Current Liabilities:

Taxes

2,627

2,839

Short-term debt

9,289

8,797

Accounts payable

4,719

4,896

Deferred income

12,469

12,026

Operating lease liabilities

1,343

1,380

Other liabilities

7,995

7,763

Total Current Liabilities

38,442

37,701

Long-term debt

55,449

54,102

Retirement related obligations

16,483

17,142

Deferred income

3,787

3,851

Operating lease liabilities

3,684

3,879

Other liabilities

15,666

14,526

Total Liabilities

133,512

131,202

EQUITY:

IBM Stockholders’ Equity:

Common stock

56,135

55,895

Retained earnings

162,559

162,954

Treasury stock — at cost

(169,386)

(169,413)

Accumulated other comprehensive income/(loss)

(28,757)

(28,597)

Total IBM Stockholders’ Equity

20,551

20,841

Noncontrolling interests

137

144

Total Equity

20,688

20,985

Total Liabilities and Equity

$

154,200

$

152,186

INTERNATIONAL BUSINESS MACHINES CORPORATION

CASH FLOW ANALYSIS

(Unaudited)

Three Months Ended

Six Months Ended

Trailing Twelve Months

June 30,

June 30,

Ended June 30,

(Dollars in Millions)

2020

2019

2020

2019

2020

Net Cash Provided by Operating Activities per GAAP:

$

3,576

$

2,941

$

8,052

$

7,700

$

15,122

Less: change in Global Financing (GF) Receivables

589

119

2,971

2,577

885

Capital Expenditures, Net

(697)

(431)

(1,434)

(1,045)

(2,759)

Free Cash Flow

2,290

2,391

3,647

4,078

11,477

Acquisitions

(6)

(42)

(19)

(43)

(32,607)

Divestitures

731

855

757

888

945

Dividends

(1,450)

(1,435)

(2,890)

(2,833)

(5,764)

Share Repurchase

(316)

(1,236)

(126)

Non-GF Debt

455

27,509

3,958

33,399

(6,649)

Other (includes GF Net Receivables and GF Debt)

213

(698)

(213)

(68)

564

Change in Cash, Cash Equivalents, Restricted Cash and Short-term Marketable Securities

$

2,233

$

28,264

$

5,241

$

34,186

$

(32,158)

INTERNATIONAL BUSINESS MACHINES CORPORATION

CASH FLOW

(Unaudited)

Three Months Ended

Six Months Ended

June 30,

June 30,

(Dollars in Millions)

2020

2019

2020

2019

Net Income from Operations

$

1,361

$

2,498

$

2,536

$

4,089

Depreciation/Amortization of Intangibles

1,678

1,294

3,313

2,740

Stock-based Compensation

247

135

436

248

Working Capital / Other

(300)

(1,106)

(1,204)

(1,954)

Global Financing A/R

589

119

2,971

2,577

Net Cash Provided by Operating Activities

$

3,576

$

2,941

$

8,052

$

7,700

Capital Expenditures, net of payments & proceeds

(697)

(431)

(1,434)

(1,045)

Divestitures, net of cash transferred

731

855

757

888

Acquisitions, net of cash acquired

(6)

(42)

(19)

(43)

Marketable Securities / Other Investments, net

(1,264)

3,779

(1,442)

3,509

Net Cash Provided by / (Used in) Investing Activities

$

(1,236)

$

4,162

$

(2,138)

$

3,309

Debt, net of payments & proceeds

(38)

22,841

1,319

27,073

Dividends

(1,450)

(1,435)

(2,890)

(2,833)

Common Stock Repurchases

(316)

(1,236)

Common Stock Transactions – Other

(137)

(59)

(168)

(111)

Net Cash Provided by / (Used in) Financing Activities

$

(1,624)

$

21,031

$

(1,739)

$

22,894

Effect of Exchange Rate changes on Cash

101

129

(301)

27

Net Change in Cash, Cash Equivalents and Restricted Cash

$

817

$

28,263

$

3,874

$

33,930

INTERNATIONAL BUSINESS MACHINES CORPORATION

SEGMENT DATA

(Unaudited)

Three Months Ended June 30, 2020

Cloud &

Global

Global

Cognitive

Business

Technology

Global

(Dollars in Millions)

Software

Services

Services

Systems

Financing

Revenue

External

5,748

3,890

6,316

1,852

265

Internal

743

55

304

240

241

Total Segment Revenue

6,491

3,945

6,621

2,092

506

Pre-tax Income / (Loss) from Continuing Operations

1,708

362

250

248

176

Pre-tax Margin

26.3

9.2

3.8

11.8

34.9

Change YTY Revenue – External

3.3

(7.3)

(7.6)

5.7

(24.5)

Change YTY Revenue - External @constant currency

4.6

(6.0)

(5.4)

6.3

(22.7)

Three Months Ended June 30, 2019

Cloud &

Global

Global

Cognitive

Business

Technology

Global

(Dollars in Millions)

Software*

Services*

Services

Systems

Financing

Revenue

External

5,563

4,197

6,837

1,753

351

Internal

607

69

302

171

281

Total Segment Revenue

6,170

4,266

7,139

1,924

632

Pre-tax Income / (Loss) from Continuing Operations

2,007

290

235

61

239

Pre-tax Margin

32.5

6.8

3.3

3.2

37.8

______________________________

* Recast to conform with 2020 presentation.

INTERNATIONAL BUSINESS MACHINES CORPORATION

SEGMENT DATA

(Unaudited)

Six Months Ended June 30, 2020

Cloud &

Global

Global

Cognitive

Business

Technology

Global

(Dollars in Millions)

Software

Services

Services

Systems

Financing

Revenue

External

10,987

8,027

12,783

3,220

564

Internal

1,556

101

599

388

453

Total Segment Revenue

12,543

8,128

13,382

3,608

1,017

Pre-tax Income / (Loss) from Continuing Operations

2,641

633

72

31

370

Pre-tax Margin

21.1

7.8

0.5

0.9

36.4

Change YTY Revenue – External

4.3

(3.9)

(6.8)

4.5

(25.4)

Change YTY Revenue - External @constant currency

5.6

(2.6)

(4.7)

5.4

(23.9)

Six Months Ended June 30, 2019

Cloud &

Global

Global

Cognitive

Business

Technology

Global

(Dollars in Millions)

Software*

Services*

Services

Systems

Financing

Revenue

External

10,530

8,353

13,711

3,081

757

Internal

1,448

143

591

334

581

Total Segment Revenue

11,978

8,495

14,303

3,415

1,338

Pre-tax Income / (Loss) from Continuing Operations

3,792

587

510

(141)

527

Pre-tax Margin

31.7

6.9

3.6

(4.1)

39.4

______________________________

* Recast to conform with 2020 presentation.

INTERNATIONAL BUSINESS MACHINES CORPORATION

U.S. GAAP TO OPERATING (Non-GAAP) RESULTS RECONCILIATION

(Unaudited; Dollars in millions except per share amounts)

Three Months Ended June 30, 2020

Continuing Operations

Acquisition-

Retirement-

Tax

Related

Related

Reform

Operating

GAAP

Adjustments*

Adjustments**

Impacts

(Non-GAAP)

Gross Profit

8,700

187

8,887

Gross Profit Margin

48.0

1.0

Pts

49.0

S,G&A

5,248

(285)

4,962

R,D&E

1,582

1,582

Other (Income) & Expense

179

(1)

(273)

(95)

Interest Expense

323

323

Total Expense & Other (Income)

7,129

(286)

(273)

6,570

Pre-tax Income from Continuing Operations

1,571

473

273

2,318

Pre-tax Income Margin from Continuing Operations

8.7

2.6

Pts

1.5

Pts

12.8

Provision for / (Benefit from) Income Taxes***

209

108

52

369

Effective Tax Rate

13.3

1.9

Pts

0.7

Pts

15.9

Income from Continuing Operations

1,362

365

222

1,949

Income Margin from Continuing Operations

7.5

2.0

Pts

1.2

Pts

10.8

Diluted Earnings / (Loss) Per Share: Continuing Operations

1.52

0.41

0.25

2.18

Three Months Ended June 30, 2019

Continuing Operations

Acquisition-

Retirement-

Tax

Related

Related

Reform

Operating

GAAP

Adjustments*

Adjustments**

Impacts

(Non-GAAP)

Gross Profit

9,010

73

9,083

Gross Profit Margin

47.0

0.4

Pts

47.4

S,G&A

5,456

(149)

5,307

R,D&E

1,407

1,407

Other (Income) & Expense

(747)

119

(136)

(764)

Interest Expense

348

(168)

180

Total Expense & Other (Income)

6,242

(198)

(136)

5,907

Pre-tax Income from Continuing Operations

2,768

272

136

3,176

Pre-tax Income Margin from Continuing Operations

14.4

1.4

Pts

0.7

Pts

16.6

Provision for / (Benefit from) Income Taxes***

269

55

40

(14)

349

Effective Tax Rate

9.7

0.9

Pts

0.8

Pts

(0.4)

Pts

11.0

Income from Continuing Operations

2,499

217

97

14

2,827

Income Margin from Continuing Operations

13.0

1.1

Pts

0.5

Pts

0.1

Pts

14.8

Diluted Earnings / (Loss) Per Share: Continuing Operations

2.81

0.24

0.11

0.01

3.17

______________________________
*

Includes amortization of purchased intangible assets, in process R&D, transaction costs, applicable restructuring and related expenses, tax charges related to acquisition integration and pre-closing charges, such as financing costs.

**

Includes amortization of prior service costs, interest cost, expected return on plan assets, amortized actuarial gains/losses, the impacts of any plan curtailments/settlements and pension insolvency costs and other costs.

***

Tax impact on operating (non-GAAP) pre-tax income from continuing operations is calculated under the same accounting principles applied to the As Reported pre-tax income under ASC 740, which employs an annual effective tax rate method to the results.

INTERNATIONAL BUSINESS MACHINES CORPORATION

U.S. GAAP TO OPERATING (Non-GAAP) RESULTS RECONCILIATION

(Unaudited; Dollars in millions except per share amounts)

Six Months Ended June 30, 2020

Continuing Operations

Acquisition-

Retirement-

Tax

Related

Related

Reform

Operating

GAAP

Adjustments*

Adjustments**

Impacts

(Non-GAAP)

Gross Profit

16,622

375

16,998

Gross Profit Margin

46.6

1.1

Pts

47.6

S,G&A

11,203

(570)

10,633

R,D&E

3,207

3,207

Other (Income) & Expense

361

(1)

(538)

(178)

Interest Expense

649

649

Total Expense & Other (Income)

15,101

(571)

(538)

13,992

Pre-tax Income from Continuing Operations

1,522

946

538

3,006

Pre-tax Income Margin from Continuing Operations

4.3

2.7

Pts

1.5

Pts

8.4

Provision for / (Benefit from) Income Taxes***

(1,017)

210

65

149

(592)

Effective Tax Rate

(66.8)

28.0

Pts

14.1

Pts

5.0

Pts

(19.7)

Income from Continuing Operations

2,538

736

472

(149)

3,598

Income Margin from Continuing Operations

7.1

2.1

Pts

1.3

Pts

(0.4)

Pts

10.1

Diluted Earnings / (Loss) Per Share: Continuing Operations

2.83

0.83

0.53

(0.17)

4.02

Six Months Ended June 30, 2019

Continuing Operations

Acquisition-

Retirement-

Tax

Related

Related

Reform

Operating

GAAP

Adjustments*

Adjustments**

Impacts

(Non-GAAP)

Gross Profit

17,053

149

17,202

Gross Profit Margin

45.7

0.4

Pts

46.1

S,G&A

10,147

(273)

9,873

R,D&E

2,840

2,840

Other (Income) & Expense

(820)

142

(274)

(951)

Interest Expense

558

(204)

354

Total Expense & Other (Income)

12,402

(335)

(274)

11,793

Pre-tax Income from Continuing Operations

4,651

484

274

5,409

Pre-tax Income Margin from Continuing Operations

12.5

1.3

Pts

0.7

Pts

14.5

Provision for / (Benefit from) Income Taxes***

558

104

66

(155)

574

Effective Tax Rate

12.0

0.8

Pts

0.6

Pts

(2.9)

Pts

10.6

Income from Continuing Operations

4,093

381

208

155

4,836

Income Margin from Continuing Operations

11.0

1.0

Pts

0.6

Pts

0.4

Pts

13.0

Diluted Earnings / (Loss) Per Share: Continuing Operations

4.58

0.44

0.23

0.17

5.42

______________________________
*

Includes amortization of purchased intangible assets, in process R&D, transaction costs, applicable restructuring and related expenses, tax charges related to acquisition integration and pre-closing charges, such as financing costs.

**

Includes amortization of prior service costs, interest cost, expected return on plan assets, amortized actuarial gains/losses, the impacts of any plan curtailments/settlements and pension insolvency costs and other costs.

***

Tax impact on operating (non-GAAP) pre-tax income from continuing operations is calculated under the same accounting principles applied to the As Reported pre-tax income under ASC 740, which employs an annual effective tax rate method to the results.

INTERNATIONAL BUSINESS MACHINES CORPORATION

U.S. GAAP TO OPERATING (Non-GAAP) RESULTS RECONCILIATION

(Unaudited; Dollars in millions except per share amounts)

Trailing

Three Months Ended

Six Months Ended

Twelve Months Ended

June 30, 2020

June 30, 2020

June 30, 2020

Change YTY

Change YTY

Change YTY

Revenue Adjusting for Divested Businesses and Currency

Cloud

Total IBM

Total IBM

Cloud

Revenue as reported

30.1

(5.4)

(4.4)

20.2

Impact from divested businesses

2.4

Pts

2.0

Pts

2.0

Pts

1.8

Pts

Currency impact

1.8

Pts

1.6

Pts

1.6

Pts

1.3

Pts

Revenue adjusting for divested businesses and currency (non-GAAP)

34.3

(1.9)

(0.9)

23.4

Three Months Ended

Change

Red Hat Revenue, Normalized for Historical Comparability

June 30, 2020

June 30, 2019

YTY

YTY @constant currency

Red Hat revenue as reported in IBM consolidated results (1)

867

Add: Red Hat revenue prior to acquisition (2)

936

Add: Purchase accounting deferred revenue and intercompany adjustments (3)

227

Red Hat revenue, normalized for historical comparability (non-GAAP)

1,094

936

17

18

(1) Represents GAAP revenue as reported by IBM, which is included in the Cloud & Cognitive Software segment.

(2) Revenue for the three months ended June 30, 2019 represents pre-acquisition Red Hat standalone revenue and is included for comparative purposes.

(3) Represents the second-quarter 2020 impact of the deferred revenue purchase accounting adjustment and adjustments to add back revenue which was eliminated for sales between Red Hat and IBM. This line represents revenue that would have been recognized by Red Hat under GAAP if the acquisition had not occurred, but was not recognized by IBM due to purchase accounting and intercompany adjustments.

""

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