IBM Let's Create
2023 Annual Report
Arvind Krishna
Chairman and Chief Executive Officer
Dear IBM Investor:
In 2023, we made significant progress in our journey to become a more innovative and focused company, built around the two most transformational technologies of our time: hybrid cloud and AI. We executed against a proven strategy, refined our portfolio, expanded our ecosystem of partners, and enhanced productivity throughout IBM.
We also continued to address the evolving needs of our clients. As AI becomes a top priority, our clients are using watsonx
- IBM's flagship AI and data platform - to help revolutionize customer service, modernize countless lines of code, and automate enterprise tasks to boost employee productivity.
I have never been more confident in IBM's direction. Today's IBM is more capable and more productive. We have a strong portfolio and a solid foundation to support sustainable growth. And we are delivering on our promise to be the catalyst that makes the world work better.
2023 performance
For the year, IBM generated $61.9 billion in revenue, up 3% at constant currency, and $11.2 billion of free cash flow, up $1.9 billion year-over-year. We experienced growing demand for our new watsonx platform, marked by thousands of client interactions. This demand contributed to roughly doubling the book of business for watsonx and generative AI from the third to the fourth quarter.
IBM 2023 Annual Report | 1 |
Software | Consulting | Infrastructure |
We also expanded profit margins by emphasizing high- value offerings in Consulting and Software and by digitally transforming our processes and scaling AI to enhance productivity within IBM.
Software revenues were up more than 5% at constant currency, as clients turned to our advanced software capabilities across hybrid cloud, data & AI, automation, transactions processing, and security. Our performance was led by Red Hat, and we had solid growth in our recurring revenue base.
Consulting revenues were up 6% at constant currency. We capitalized on the growing need for expertise in digital transformation and AI deployment, leveraging our consulting services in data and technology consulting, cloud modernization, application operations, and business transformation.
Infrastructure revenues decreased by 4% at constant currency, in line with the typical product cycle dynamics in this segment. IBM z16 is significantly outperforming previous cycles, demonstrating the enduring value this platform provides to our clients.
IBM's revenue growth and cash generation enabled us to make substantial investments in the business and deliver value to our shareholders. In 2023, IBM spent nearly $7 billion on research and development, more than $5 billion to acquire nine companies, and returned more than $6 billion to stockholders through dividends.
Technology and expertise
AI and hybrid cloud continue to drive value creation, allowing businesses to scale, increase productivity, and seize new market opportunities. IBM has built two powerful platforms to capitalize on the strong demand for both technologies: watsonx for AI, and Red Hat OpenShift for hybrid cloud.
Watsonx is our comprehensive AI and data platform, built to deliver AI models and give our clients the ability to manage the entire lifecycle of AI for business, including the training, tuning, deployment, and ongoing governance of those models. As clients shift from experimenting with generative AI to building and deploying it throughout their enterprises, we are focused on practical and urgent business use cases, including code modernization, customer service, and digital labor.
Financial institutions like Citi, Bradesco, and NatWest are using watsonx to help increase productivity, improve code quality, and enhance customer experiences. Our enterprise-ready AI capabilities are being embedded into SAP solutions. EY launched EY.ai Workforce, a new solution that will use watsonx Orchestrate to automate HR tasks and processes. Service partners such as NTT Data Business Solutions, Wipro, and TCS are launching watsonx Centers of Excellence to scale AI-powered client innovations. And generative AI from watsonx, combined with expertise from Consulting, is enhancing the digital experiences of the U.S. Open, the Masters, Wimbledon, the GRAMMYs, and ESPN Fantasy Football.
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IBMers are also embracing watsonx to unleash greater productivity, eliminate complexity, simplify workflows, and automate manual tasks. Examples include processing HR and IT tasks more easily, generating code up to 60% faster, and answering client inquiries more quickly.
Hybrid cloud architectures have seen massive adoption, with nearly 80% of IT decision makers operating hybrid cloud environments. But nearly two thirds of companies report difficulty managing these complex environments, a challenge that will grow as businesses deploy generative AI across multiple clouds. IBM's industry-leading hybrid cloud platform, based on Red Hat OpenShift, can solve this problem. It helps our clients move from architectures that are hybrid by default to architectures that are hybrid by design. It enables companies to run workloads seamlessly across multiple clouds, both public and private, to simplify operations, unify data and applications, and accelerate new innovations. And it complements our watsonx platform, allowing clients the flexibility to manage multi-model AI across complex, multi- cloud environments.
Virgin Money is harnessing IBM's hybrid cloud to enable new digital customer experiences and improve their credit card services. Red Hat OpenShift is now the preferred platform provider to Nokia's core network applications business. And the Boston Red Sox are leveraging our hybrid cloud technologies to improve the club's operations.
Experts from Consulting provide differentiated value as we establish IBM as a leader in AI for business, just as they did with our hybrid cloud business. Our extensive network of data and AI consultants has already facilitated thousands of hands-on client interactions. IBM combines technology with consulting services to deliver the data architecture, security, and governance our clients need to adopt trusted AI solutions.
IBM consultants are working with Riyadh Air on mission- critical technology and business capabilities to support the path to their first flight. NATO chose IBM to help detect and respond to cyber threats with greater speed. And Diageo partnered with Consulting and SAP on an ambitious five-year business transformation and cloud migration.
Throughout 2023, clients modernized their infrastructure with the z16 platform in alignment with their hybrid cloud and AI strategies. IBM launched a new suite of AI offerings for IBM Z
along with new machine learning, intelligence, and operational improvements for z/OS.
In addition, we enhanced IBM's portfolio with nine acquisitions in 2023, including Apptio, a suite of software to help our clients better understand their technology investment and the business value it delivers.
Client engagement and partnership
IBM's success is directly tied to the success of our clients. Their problems are our problems. And their opportunities are our opportunities. That is why we developed a more collaborative, experience-based approach that allows us to respond effectively to their needs.
The IBM Garage Method, now integrated across our business, combines agile development and design thinking to facilitate co-creation with our clients. Clients have embraced this highly collaborative way of working with IBM, turning ideas into outcomes with thousands of Garage engagements throughout the year.
Our approach to client engagement allows us to meet clients where they are, bringing together whatever technology and expertise are needed across our expanding partner ecosystem. That is why we strengthened our strategic partnerships with key industry players like Adobe, AWS, Microsoft, SAP, Salesforce, Samsung, and others. Strategic partnerships now make up more than 40% of our Consulting revenue and delivered double-digit growth in both signings and revenue for the year.
Research and development
In 2023, IBM Research advanced the fundamental science of several critical technologies, including AI, quantum computing, and semiconductors.
In AI, we demonstrated our ability to quickly transform research into commercial applications. We launched the watsonx AI and data platform, introduced the groundbreaking Granite AI foundational model, and developed new AI- optimized hardware.
We have IBM Quantum System One engagements with several leading organizations, including Cleveland Clinic, the Platform for Digital and Quantum Innovation of Quebec, Rensselaer Polytechnic Institute, and the University of Tokyo. We also
IBM 2023 Annual Report | 3 |
unveiled our 133-qubit Quantum Heron processor, which enhanced the performance, efficiency, and scalability of the newly deployed IBM Quantum System Two. And our work on error correction and mitigation is helping to lay the foundation for a new era of quantum utility.
Research also pushed the limits of semiconductor design and packaging, building on recent innovations such as the 2nm node chip, hybrid bonding, and vertical transistors. We are working with Rapidus to propel Japan's push for leadership in semiconductor research and manufacturing, and we are participating in an initiative with New York State, Micron, and others to jointly invest $10 billion in semiconductor R&D.
The promise of IBM
IBM is in the business of shaping the future for our clients. That future must be built on trust.
IBM is at the forefront of technologies, like AI and quantum computing, which will fundamentally change the way we work and live. We bear significant responsibility to develop those technologies ethically and deploy them with transparency and trust. That is why we built powerful AI governance into our watsonx platform and developed quantum-safe cryptography to secure sensitive data. It is why we advocate for smart AI regulation, including holding those who develop and deploy AI accountable for fraudulent, discriminatory, and harmful activity. And it is why IBM and Meta announced the formation of the AI Alliance, a group of more than 70 organizations dedicated to advancing open, safe, and responsible AI.
We also earn trust by operating with integrity, staying true to our values, and addressing the needs of all stakeholders. We continue to advance our efforts on the environment, ethics, and education. IBM has achieved a 63% reduction in greenhouse gas emissions against base year 2010.
We announced a new program to train 1,000 suppliers in
technology ethics by 2025. And IBM committed to training two million learners in AI by the end of 2026 to address the technology skills gap.
But IBM's commitment to trust goes beyond our citizenship, products, and policies. We earn trust by delivering on our promises.
We articulated a clear vision for the future of IBM in the spring of 2020. We promised a more focused company built around two powerful technologies: hybrid cloud and AI. We promised fundamental changes to our go-to-market strategy, putting clients at the center of everything we do and transforming competitors into partners. And we promised operational changes to simplify our internal processes and increase our productivity. As this report details, we are fulfilling those promises.
As we look ahead, we renew our commitment to the journey we began in 2020. We will continue to innovate, to execute with speed and purpose, find more opportunities for operational efficiency, and further enhance our productivity by employing the same technologies we use to drive growth for our clients. And as always, we will be the catalyst that makes the world work better, bringing together our colleagues, clients, and partners with a simple invitation: Let's Create.
This is the promise of IBM.
Arvind Krishna
Chairman and Chief Executive Officer
In an effort to provide additional and useful information regarding the company's financial results and other financial information, as determined by generally accepted accounting principles (GAAP), these materials contain non-GAAP financial measures on a continuing operations basis, including revenue growth rates adjusted for constant currency and free cash flow. The rationale for management's use of this non-GAAP information is included on page 6 and 31 of the company's 2023 Annual Report, which is Exhibit 13 to the Form 10-K submitted with the SEC on February 26, 2024. For reconciliation of these non-GAAP financial measures to GAAP and other information, please refer to pages 17 and 31 of the company's 2023 Annual Report. For watsonx and generative AI, book of business includes Software transactional revenue, SaaS Annual Contract Value and Consulting signings.
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Report of Financials | 5 | |||
International Business Machines Corporation and Subsidiary Companies | ||||
MANAGEMENT DISCUSSION | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS | |||
Overview | 6 | Basis & Policies | ||
Forward-Looking and Cautionary Statements | 7 | A | Significant Accounting Policies | 50 |
Management Discussion Snapshot | 8 | B | Accounting Changes | 63 |
Description of Business | 11 | Performance & Operations | ||
Year in Review | 17 | C | Revenue Recognition | 64 |
Prior Year in Review | 28 | D | Segments | 66 |
Other Information | 29 | E | Acquisitions & Divestitures | 71 |
Looking Forward | 29 | F | Other (Income) and Expense | 78 |
Liquidity and Capital Resources | 30 | G | Research, Development & Engineering | 78 |
Critical Accounting Estimates | 33 | H | Taxes | 78 |
Currency Rate Fluctuations | 36 | I | Earnings Per Share | 82 |
Market Risk | 36 | Balance Sheet & Liquidity | ||
Financing | 38 | J | Financial Assets & Liabilities | 83 |
K | Inventory | 84 | ||
Report of Management | 41 | L | Financing Receivables | 84 |
Report of Independent Registered | M | Property, Plant & Equipment | 87 | |
Public Accounting Firm | 42 | N | Leases | 87 |
O | Intangible Assets Including Goodwill | 90 | ||
CONSOLIDATED FINANCIAL STATEMENTS | P | Borrowings | 91 | |
Income Statement | 44 | Q | Other Liabilities | 94 |
Comprehensive Income | 45 | R | Commitments & Contingencies | 95 |
Balance Sheet | 46 | S | Equity Activity | 97 |
Cash Flows | 47 | Risk Management, Compensation/Benefits & Other | ||
Equity | 48 | T | Derivative Financial Instruments | 100 |
U | Stock-Based Compensation | 104 | ||
V | Retirement-Related Benefits | 107 | ||
W Subsequent Events | 121 | |||
Performance Graphs | 122 | |||
Stockholder Information | 123 | |||
Board of Directors and Senior Leadership | 124 |
- Management Discussion
International Business Machines Corporation and Subsidiary Companies
OVERVIEW
The financial section of the International Business Machines Corporation (IBM or the company) 2023 Annual Report includes the Management Discussion, the Consolidated Financial Statements and the Notes to Consolidated Financial Statements. This Overview is designed to provide the reader with some perspective regarding the information contained in the financial section.
Organization of Information
- The Management Discussion is designed to provide readers with an overview of the business and a narrative on our financial results and certain factors that may affect our future prospects from the perspective of management. The "Management Discussion Snapshot" presents an overview of the key performance drivers in 2023.
- Beginning with the "Year in Review," the Management Discussion contains the results of operations for each reportable segment of the business, a discussion of our financial position and a discussion of cash flows as reflected in the Consolidated Statement of Cash Flows. Other key sections within the Management Discussion include: "Looking Forward" and "Liquidity and Capital Resources," the latter of which includes a description of management's definition and use of free cash flow.
- The Consolidated Financial Statements provide an overview of income and cash flow performance and financial position.
- The Notes follow the Consolidated Financial Statements. Among other items, the Notes contain our accounting policies, revenue information, acquisitions and divestitures, certain commitments and contingencies and retirement-related plans information.
- On November 3, 2021 we completed the separation of our managed infrastructure services unit into a new public company, Kyndryl. The accounting requirements for reporting the separation of Kyndryl as a discontinued operation were met when the separation was completed. Accordingly, the historical results of Kyndryl are presented as discontinued operations and, as such, have been excluded from continuing operations and segment results for all periods presented. Refer to note E, "Acquisitions & Divestitures," for additional information.
- In September 2022, the IBM Qualified Personal Pension Plan (Qualified PPP) purchased two separate nonparticipating single premium group annuity contracts from The Prudential Insurance Company of America and Metropolitan Life Insurance Company (collectively, the Insurers) and irrevocably transferred to the Insurers approximately $16 billion of the Qualified PPP's defined benefit pension obligations and related plan assets, thereby reducing our pension obligations and assets by the same amount. The group annuity contracts were purchased using assets of the Qualified PPP and no additional funding contribution was required from IBM. The transaction resulted in no changes to the benefits to be received by the plan participants. As a result of this transaction we recognized a one-time,non-cash,pre-tax pension settlement charge of $5.9 billion ($4.4 billion net of tax) in the third quarter of 2022, primarily related to the accelerated recognition of accumulated actuarial losses of the Qualified PPP. Refer to note V, "Retirement-Related Benefits," for additional information.
- Effective January 1, 2023, due to advances in technology, we increased the estimated useful lives of our server and network equipment from five to six years for new assets and from three to four years for used assets. Based on the carrying amount of server and network equipment included in property, plant and equipment-net in our Consolidated Balance Sheet as of December 31, 2022, the effect of this change in accounting estimate was an increase in income from continuing operations before income taxes of $208 million or $0.18 per basic and diluted share for the year ended December 31, 2023.
- In 2023, we executed workforce rebalancing actions to address remaining stranded costs from portfolio actions over the last couple of years resulting in charges to pre-tax income from continuing operations of $438 million. In addition, beginning in the first quarter of 2023, we updated our measure of segment pre-tax income to no longer allocate workforce rebalancing actions to our reportable segments, consistent with our management system. Workforce rebalancing charges in 2022 and 2021 of $40 million and $182 million, respectively, were included in the segments.
- The references to "adjusted for currency" or "at constant currency" in the Management Discussion do not include operational impacts that could result from fluctuations in foreign currency rates. When we refer to growth rates at constant currency or adjust such growth rates for currency, it is done so that certain financial results can be viewed without the impact of fluctuations in foreign currency exchange rates, thereby facilitating period-to-period comparisons of business performance. Financial results adjusted for currency are calculated by translating current period activity in local currency using the comparable prior-year period's currency conversion rate. This approach is used for countries where the functional currency is the local currency. Generally, when the dollar either strengthens or weakens against other currencies, the growth at constant currency rates or adjusting for currency will be higher or lower than growth reported at actual exchange rates. Refer to "Currency Rate Fluctuations" for additional information.
- Within the financial statements and tables in this Annual Report, certain columns and rows may not add due to the use of rounded numbers for disclosure purposes. Percentages presented are calculated from the underlying whole-dollar numbers. Certain prior-year amounts have been reclassified to conform to the change in current year presentation. This is annotated where applicable.
Management Discussion | 7 |
International Business Machines Corporation and Subsidiary Companies |
Operating (non-GAAP) Earnings
In an effort to provide better transparency into the operational results of the business, supplementally, management separates business results into operating and non-operating categories. Operating earnings from continuing operations is a non-GAAP measure that excludes the effects of certain acquisition-related charges, intangible asset amortization, expense resulting from basis differences on equity method investments, retirement-related costs, certain impacts from the Kyndryl separation and their related tax impacts. Due to the unique, non-recurring nature of the enactment of the U.S. Tax Cuts and Jobs Act (U.S. tax reform), management characterizes the one-time provisional charge recorded in the fourth quarter of 2017 and adjustments to that charge as non-operating. Adjustments primarily include true-ups, accounting elections and any changes to regulations, laws, audit adjustments that affect the recorded one-time charge. Management characterizes direct and incremental charges incurred related to the Kyndryl separation as non-operating given their unique and non-recurring nature. In 2022, these charges primarily related to any net gains or losses on the Kyndryl common stock and the related cash-settled swap with a third-party financial institution, which were recorded in other (income) and expense in the Consolidated Income Statement. As of November 2, 2022, the company no longer held an ownership interest in Kyndryl. For acquisitions, operating (non-GAAP) earnings exclude the amortization of purchased intangible assets and acquisition-related charges such as in-process research and development, transaction costs, applicable retention, restructuring and related expenses, tax charges related to acquisition integration and pre-closing charges, such as financing costs. These charges are excluded as they may be inconsistent in amount and timing from period to period and are significantly impacted by the size, type and frequency of our acquisitions. Given its unique and temporary nature, management has also characterized as non-operating expense, the mark-to-market impact on the foreign exchange call option contracts to economically hedge the foreign currency exposure related to the purchase price of our announced acquisition of StreamSets and webMethods from Software AG. The mark-to-market impact is recorded in other (income) and expense in the Consolidated Income Statement and reflects the fair value changes in the derivative contracts. All other spending for acquired companies is included in both earnings from continuing operations and in operating (non-GAAP) earnings. For retirement-related costs, management characterizes certain items as operating and others as non-operating, consistent with GAAP. We include defined benefit plan and nonpension postretirement benefit plan service costs, multi-employer plan costs and the cost of defined contribution plans in operating earnings. Non-operatingretirement-related costs include defined benefit plan and nonpension postretirement benefit plan amortization of prior service costs, interest cost, expected return on plan assets, amortized actuarial gains/losses, the impacts of any plan curtailments/settlements including the one-time,non-cash,pre-tax settlement charge of $5.9 billion ($4.4 billion, net of tax) in the third quarter of 2022 and pension insolvency costs and other costs. Non-operatingretirement-related costs are primarily related to changes in pension plan assets and liabilities which are tied to financial market performance, and we consider these costs to be outside of the operational performance of the business.
Overall, management believes that supplementally providing investors with a view of operating earnings as described above provides increased transparency and clarity into both the operational results of the business and the performance of our pension plans; improves visibility to management decisions and their impacts on operational performance; enables better comparison to peer companies; and allows us to provide a long-term strategic view of the business going forward. In addition, these non-GAAP measures provide a perspective consistent with areas of interest we routinely receive from investors and analysts. Our reportable segment financial results reflect pre-tax operating earnings from continuing operations, consistent with our management and measurement system.
FORWARD-LOOKING AND CAUTIONARY STATEMENTS
Certain statements contained in this Annual Report may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Any forward-looking statement in this Annual Report speaks only as of the date on which it is made; IBM assumes no obligation to update or revise any such statements except as required by law. Forward-looking statements are based on IBM's current assumptions regarding future business and financial performance; these statements, by their nature, address matters that are uncertain to different degrees. Forward-looking statements involve a number of risks, uncertainties and other factors that could cause actual results to be materially different, as discussed more fully elsewhere in this Annual Report and in the company's filings with the Securities and Exchange Commission (SEC), including IBM's 2023 Form 10-K filed on February 26, 2024.
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Management Discussion
International Business Machines Corporation and Subsidiary Companies
MANAGEMENT DISCUSSION SNAPSHOT
($ and shares in millions except per share amounts)
Yr.-to-Yr. | |||||
2022 (1) | Percent/Margin | ||||
For year ended December 31: | 2023 | Change | |||
Revenue (2) | $ | 61,860 | $ | 60,530 | 2.2 % |
Gross profit margin | 55.4 % | 54.0 % | 1.4 pts. | ||
Total expense and other (income) | $ | 25,610 | $ | 31,531 | (18.8)% |
Income from continuing operations before income taxes | $ | 8,690 | $ | 1,156 | NM |
Provision for/(benefit from) income taxes from continuing operations | $ | 1,176 | $ | (626) | NM |
Income from continuing operations | $ | 7,514 | $ | 1,783 | NM |
Income from continuing operations margin | 12.1 % | 2.9 % | 9.2 pts. | ||
Loss from discontinued operations, net of tax | $ | (12) | $ | (143) | (91.8)% |
Net income | $ | 7,502 | $ | 1,639 | NM |
Earnings per share from continuing operations-assuming dilution | $ | 8.15 | $ | 1.95 | NM |
Consolidated earnings per share-assuming dilution | $ | 8.14 | $ | 1.80 | NM |
Weighted-average shares outstanding-assuming dilution | 922.1 | 912.3 | 1.1 % | ||
Assets (3) | $ | 135,241 | $ | 127,243 | 6.3 % |
Liabilities (3) | $ | 112,628 | $ | 105,222 | 7.0 % |
Equity (3) | $ | 22,613 | $ | 22,021 | 2.7 % |
- Includes a one-time,non-cash,pre-tax pension settlement charge of $5.9 billion ($4.4 billion net of tax) resulting in an impact of ($4.84) to diluted earnings per share from continuing operations and an impact of ($4.83) to consolidated diluted earnings per share. Refer to note V, "Retirement- Related Benefits," for additional information.
- Year-to-yearrevenue growth of 2.9 percent adjusted for currency.
- At December 31.
NM-Not meaningful
The following table provides the company's operating (non-GAAP) earnings for 2023 and 2022. Refer to page 28 for additional information.
($ in millions except per share amounts)
Yr.-to-Yr. | |||||
For year ended December 31: | 2023 | 2022 | Percent Change | ||
Net income as reported (1) | $ | 7,502 | $ | 1,639 | NM |
Loss from discontinued operations, net of tax | (12) | (143) | (91.8)% | ||
Income from continuing operations (1) | $ | 7,514 | $ | 1,783 | NM |
Non-operating adjustments (net of tax) | |||||
Acquisition-related charges | 1,292 | 1,329 | (2.8)% | ||
Non-operatingretirement-related costs/(income) (1) | (30) | 4,933 | NM | ||
U.S. tax reform impacts | 95 | (70) | NM | ||
Kyndryl-related impacts | - | 351 | (100.0)% | ||
Operating (non-GAAP) earnings | $ | 8,870 | $ | 8,326 | 6.5 % |
Diluted operating (non-GAAP) earnings per share | $ | 9.62 | $ | 9.13 | 5.4 % |
- 2022 includes a one-time,non-cash pension settlement charge of $4.4 billion net of tax. NM-Not meaningful
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IBM - International Business Machines Corporation published this content on 11 March 2024 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 12 March 2024 02:39:04 UTC.
