IBM Targeting $12+ Billion in 2024 Free Cash Flow

Image: Shares of IBM are flirting with record highs.

By Brian Nelson, CFA

IBM (IBM) reported mixed third quarter results October 23 with revenue coming in lower than expectations, while non-GAAP earnings per share topped the consensus forecast. Revenue advanced 1% (2% on a constant currency basis) in the period, with software revenue up 9.6%, consulting revenue down 0.5%, and infrastructure revenue down 7%.

In the third quarter, operating gross profit came in at $8.6 billion, up 5% from the same period a year ago thanks in part to 2.1 percentage points of operating gross profit margin improvement. Operating pre-tax income came in at $2.5 billion, up 8%, thanks to a 1 percentage point improvement in operating pre-tax income margin. Operating net income was $2.2 billion, up 6% year-over-year, while operating diluted earnings per share came in at $2.30, up 5% year-over-year.

Management had the following to say about the quarter in the press release:

Our third-quarter performance was led by double-digit growth in Software, including a re-acceleration in Red Hat. We continue to see great momentum in AI as our models are trusted, fit-for-purpose, and lower cost, with performance leadership. Our generative AI book of business now stands at more than $3 billion, up more than $1 billion quarter to quarter. Heading into the final quarter of 2024, we expect fourth-quarter constant currency revenue growth to be consistent with the third quarter, with continued strength in Software. We are confident in our ability to deliver more than $12 billion in free cash flow for the year, driven by continued expansion of our operating margins.

Our investments are paying off in Software as we’ve repositioned our portfolio in recent years. In the third quarter, Software delivered broad-based growth and now represents nearly 45 percent of our total revenue. Our ongoing focus on product mix, coupled with our productivity initiatives enables us to continue to drive operating leverage in our underlying profit performance. With our strong cash generation, we are well-positioned to continue investing for growth while returning value to shareholders through dividends.

In the third quarter, IBM generated $2.9 billion in cash from operations, while free cash flow was $2.1 billion, up $0.4 billion from the same period last year. Year-to-date, IBM hauled in $9.1 billion in net cash from operating activities and generated free cash flow of $6.6 billion, up $1.5 billion from the same period a year ago. Dividends paid for the first nine months of the year were $4.6 billion, comfortably covered by free cash flow generation.

IBM continues to expect to generate more than $12 billion in free cash flow for 2024 and for fourth-quarter constant currency revenue growth to be consistent with its most recently reported third quarter. IBM ended the third quarter with $13.7 billion in cash and marketable securities versus debt, including financing debt, of $56.6 billion. Though IBM has a large net debt position, we’re generally positive on its dividend given free cash flow coverage. Shares yield 3% at the time of this writing.

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