“In March, our software transactions stalled nearly overnight”
As a sign of things to come, IBM’s Q1 2020 earnings were an intriguing bellwether for the market, amid the ongoing turmoil caused by the coronavirus pandemic and associated economic shutdown.
The company on late Monday reported revenue of $17.6 billion for the quarter — down 3.4 percent — and withdrew 2020 guidance, saying it was impossible to predict how much continued impact there was going to be from the outbreak, which has turned the global economy on its head through Q1.
“In March, our software transactions stalled nearly overnight, as our clients shifted their focus to resiliency efforts”, CFO Jim Kavanaugh said on an earnings call, adding that IBM saw a particular pullback “in many European countries around project base, transformational base activity in next generation applications like S/4HANA, Oracle, and Workday.”
That aside, and amid the circumstances, Big Blue looked resilient to the sharp contraction of the global economy, with cloud, hardware and Red Hat earnings growing strongly despite the widespread market turmoil. Here are five key takeaways Computer Business Review took from IBM’s earnings call.
1: Shopping Basket Poised
There’s no doubt about it. IBM — which made the technology sector’s largest ever acquisition with the $34 billion buyout of open source heavyweight Red Hat in 2018 — is set to make more acquisitions.
New CEO Arvind Krishna, leading his first earnings call, said both deals and divestments were on the horizon: “We will continue investing including acquisitions… It doesn’t have to be accretive on month one or day one.
“As long as it’s a healthy business, provides us the kind of growth profile, and provides us… sufficient synergy [we will consider it].”
He drove home the point in the Q&A, saying: “As it gets past the next few months, we will get back to an acquisitive strategy.”
The focus is simple, he said: growth.
2: Cash to Hand – Able to Support Clients
“Over the last few weeks we’ve gotten questions from investors on our ability to support clients given the shutdown in some countries. I can tell you that in India, we had over 98 percent of our practitioners working remotely within 48 hours of lockdown”, CEO Krishna told analysts.
95%+ 350K IBM workforce working remote with impressive 48hr transition to remote work for 98% of services practitioners in India #IBM1Q20. Recognised client shift from big ticket transformational spend to cementing business operations. Signalling post pandemic rise in cloud ops
— bolarotibi (@bolarotibi) April 21, 2020
Whatever the outcome of the pandemic, IBM is in a robust financial position, he said, with significant cash and liquidity to hand.
As CFO Kavanaugh noted: “We ended March with a cash balance of $12 billion, which is up $3 billion from year-end.
“Bottom line, we have a strong cash position and ample credit available during these uncertain times to support and invest in the business… We also have over $15 billion of unused credit facilities. While we have no plans to draw on the facilities, they are available as backup liquidity, and our debt covenants are well within the required levels. Our overall shareholder payout remains at a comfortable level and we remain fully committed to our dividend.”
3: Sweet Spots: Red Hat and Cloud
Cloud revenue was up 23 percent in the quarter and has now grown to $22 billion over the last 12 months. Red Hat revenue growth stood at 20 percent. CFO Kavanaugh noted: “RHEL has proved to be mission-critical for many customers, particularly in this environment, and Infrastructure revenue was again up double-digits. Application Development and emerging technologies was up nearly 40 percent this quarter, driven by OpenShift and Ansible.”
He added: “IBM has always focused on the enterprise space and within that, our business is more concentrated in large enterprises.
“For decades, we have run our client’s most critical processes, like core banking systems, supply chains, and claims processing.”
That insulates the company from some market stresses, he said, adding that “we have long-term relationships with these clients in the form of multiyear services contracts, recurring software streams and financing arrangements.”
4: Bumpy Times Ahead
Needless to say, it was not all sweetness and light.
Comments on the earnings call suggested that customers had been slow to react, with BAU continuing right through February.
Q2, ultimately, may reflect the impact of the pandemic better.
As IBM’s CFO put it: “Looking at the first quarter, through February, we were tracking roughly in line with our expectations.
“As we got into March, the health situation and resulting social distancing became more widespread. As you would expect, we saw a noticeable change in client priorities… For those clients that did engage at the end of the quarter, there was a noticeable change in priorities where focus very quickly shifted to the stability of their operations and preservation of cash.”
The silver lining? “While in this environment we expect to have some impact due to lower business volumes, this will ultimately lead to an acceleration in the shift of mission-critical workloads to the cloud.”
“The ultimate outcome that I am absolutely committed to is growth for our Company as we emerge from the pandemic” said CEO Krishna.
“A key area of focus is to ensure that IBM leads in the two major transformational journeys our clients are on, cloud and AI”, he added, reiterating earlier comments when taking over the role.
“I want IBMers to lead with a more technical approach. I want our teams to showcase the value of a solution as early as possible”, he added.
And it won’t all be 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 Revenue Breakdown, Q1 2020:
Global Technology Services, $6.5B (consensus: $6.52B); Cloud and Cognitive Software, $5.2B (consensus: $5.33B); Global Business Services, $4.1B (consensus: $3.93B); Systems, $1.4B (consensus: $1.41B).