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IBM revenue drops 3% from a year ago in last quarter under Rometty

Wired senior staff writer Cade Metz and Arvind Krishna, then senior vice president and director at IBM Research, speak onstage at the Wired Business Conference in New York on June 16, 2016.

Brian Ach | Wired | Getty Images

IBM stock moved as much as 4% lower in extended trading on Monday after the company released first-quarter results that showed a return to revenue declines as coronavirus took hold.

Here’s how the company did:

  • Earnings: $1.84 per share, adjusted
  • Revenue: $17.57 billion

Analysts surveyed by Refinitiv had expected $1.80 in earnings per share, adjusted, on $17.62 billion in revenue for the first quarter. Comparing IBM’s results against analysts’ estimates is not straightforward, though, given that the coronavirus impacted economies around the world in the quarter.

IBM withdrew its guidance for the full year in the context of Covid-19, according to a statement. Last quarter IBM’s 2020 forecast was at least $13.35 in earnings per share on an adjusted basis. Analysts had been looking for $11.73 in earnings per share on an adjusted basis, according to Refinitiv. Three months ago the company had also called for growth in revenue, earnings on an adjusted basis and free cash flow for 2020, along with a higher operating gross margin.

Net income for the quarter totaled $1.18 billion in the quarter, down 26% year over year. Revenue decreased 3.4% on an annualized basis in the first quarter as the company dealt with the spread of coronavirus and directed employees to work remotely. One quarter ago the company ended a streak of five consecutive quarters of falling revenue.

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“Looking at the first quarter, through February we were tracking roughly in-line with our expectations,” IBM finance chief Jim Kavanaugh said on a conference call with analysts on Monday. “As we got into March, the health situation and resulting social distancing became more widespread. As you would expect, we saw noticeable change in client priorities. With that, there was effectively a pause, as clients understandably dealt with their most pressing needs. This was most pronounced in our software business, where the vast majority of transactions typically close-in the last two weeks of the quarter.”

Krishna also joined Monday’s quarterly conference call with analysts, following years of predecessor Ginni Rometty being absent on those calls. He committed to being on these calls going forward.

“My approach is straightforward,” Krishna said. “I am going to focus on growing the value of the company. This includes better aligning our portfolio around hybrid cloud and AI [artificial intelligence] to meet the evolving needs of the market. We will continue investing, including acquisitions. As you have seen, we have divested parts of software and services that did not align with our focus areas. This will continue.”

IBM’s Global Technology Services segment, which includes infrastructure and cloud services and technology support services, posted $6.47 billion in revenue, down 5.9% year over year. It came in lower than the $6.51 billion consensus among analysts polled by FactSet.

The company’s Cloud and Cognitive Software segment, containing transaction processing platforms, cognitive applications and cloud and data platforms like Red Hat, produced $5.24 billion in revenue. It was up 5.5% and below the $5.30 billion FactSet consensus estimate. Red Hat revenue rose 18% on a normalized basis. Some customers opted to defer purchases for transaction processing, and retail customers hit pause on cognitive applications deals, Kavanaugh said.

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Global Business Services, the segment with consulting, application management and process services, contributed $4.14 billion in revenue, which was down 0.5% year over year. The result beat the FactSet consensus of $3.91 billion.
Systems revenue, from systems hardware and operating systems, totaled $1.37 billion. That number was up 3% and lower than the $1.42 billion FactSet consensus. The Z line of mainframe computers within Systems was up 59% as sales of the z15 mainframe continued.

In the second quarter IBM could take additional structural actions that could lead to cost savings, Kavanaugh said. 

Krishna, who has been at IBM since 1990, took the reins from Rometty as the company’s CEO on April 6. Previously he has been in charge of cloud and research at the company.

In the quarter IBM announced a 10-year services deal with Banco Sabadell of Spain that includes a hybrid-cloud component.

David Holt, an analyst at CFRA Research, lowered his price target on IBM stock to $144 from $165 in a note distributed to clients on Monday.

“At current levels, we think shares have adequately discounted future Covid-19 setbacks, especially when you consider the lackluster revenue base IBM is starting with,” wrote Holt, who kept his buy rating on IBM stock. “Oddly enough, the current backdrop could work in IBM’s favor, as we think the company could see a smaller downside revision than most under our coverage, making it easier for fundamentals to exceed current expectations, especially with the healthy degree of fear currently embedded in the market.” 

Excluding activity after the release of the earnings statement, IBM shares are down about 10% since the start of the year.

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