Earnings

IBM earnings: Still searching for growth

After a rare quarter of revenue growth in the fourth quarter of 2019, IBM revenue fell 3.4%, which has been a steady pattern for Big Blue over the last few years.

IBM logo

IBM's first-quarter earnings are in, and amid the COVID-19 pandemic, they aren't looking rosy.

  • Q1 revenue: $17.6 billion (-3.4% YoY, -19% QoQ, vs. $17.6 billion expected)
  • Q1 earnings: $1.2 billion (-26% YoY, -68% QoQ)
  • Q2 guidance: Like many companies, IBM is no longer providing guidance for the rest of the year due to the impact of COVID-19.

The big number: After a rare quarter of revenue growth in the fourth quarter of 2019, IBM revenue fell 3.4%, which has been a steady pattern for Big Blue over the last few years. Arvind Krishna, IBM's new CEO, told analysts that "you should look at [revenue] growth as the number one most important metric" when evaluating IBM's performance over the next few years, as it attempts to recover from the COVID-19 pandemic.

People are talking: "As you would expect, we saw a noticeable change in client priorities. With that, there was effectively a pause, as clients understandably dealt with their most pressing needs," James Kavanaugh, IBM's chief financial officer, said on the earnings call, describing what the company saw during March.

Opportunities: Red Hat is likely to be an important catalyst for IBM revenue over the next year or so: The subsidiary signed the two biggest deals in its history during the first quarter, Kavanaugh said. Red Hat is well-positioned to help IBM's customers — most of whom are still operating very old-fashioned tech infrastructure — modernize their portfolios.

The other metric Krishna urged analysts to follow was the growth of IBM's hybrid cloud business, which helps companies run software both on public clouds and their own servers. Red Hat's software and services are a key part of IBM's hybrid cloud strategy, and progress here will show how quickly IBM customers are actually updating their infrastructure.

Threats: IBM revenue has been on a steady decline for years, thanks to its legacy software base and inability to cash in on cloud computing — and a global pandemic is not going to help. And while it's not that surprising that IBM reported a drop in customer activity during March, all of its competitors have yet to report their numbers this quarter — they may not have seen as strong a plunge.

Also, IBM currently only has $12 billion in cash and $64.3 billion in debt, although it is still generating cash. "Liquidity is essential," Krishna said. "Without that, nobody is going to survive through this next period."

The power struggle: Like many enterprise technology companies, a significant chunk (60%) of IBM's revenue comes from recurring contracts that were signed months or years ago. But Kavanaugh said that some of its more transactional businesses, such as software, saw customer activity fall off a cliff in March, as corporate customers are putting purchases on hold.

Enterprise software and services tend to have long sales cycles, and people being people, a lot of deals tend to close in the last few weeks of a quarter. So the timing of the outbreak really couldn't have been worse, but if deals that were delayed in the middle of the storm eventually get hammered out in the second or third quarters of the year, the long-term impact on IBM's business might not be as pronounced.

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