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International Business Machines Corp. revealed Monday that revenue returned to a decline in the first quarter amid the spread of COVID-19, even as Red Hat sales boosted its cloud business, and said it was pulling its annual forecast for now.
The company reported first-quarter net income of $1.18 billion, or $1.31 a share, compared with $1.59 billion, or $1.78 a share, in the year-ago period. Adjusted earnings were $1.84 a share, down from $2.25 a share a year ago. Revenue declined to $17.57 billion from $18.18 billion in the year-ago quarter. Analysts surveyed by FactSet had forecast adjusted earnings of $1.81 a share on revenue of $17.59 billion on average.
The decline in revenue returns Big Blue to a losing streak it briefly snapped when it barely managed to eke out a slight rise in sales in the fourth quarter. IBM’s sales have declined year-over-year in all but four of the past 32 quarters.
“Looking at the first quarter, through February we were tracking roughly in-line with our expectations,” said Chief Financial Officer James Kavanaugh in the conference call. “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,” Kavanaugh said, especially in the retail industry. “This was most pronounced in our software business, where the vast majority of transactions typically close-in the last two weeks of the quarter.”
IBM IBM, +0.24% shares slipped 3% in after-hours activity, after gaining 0.4% to close the regular session at $120.58. For the year, IBM shares are down about 10%, while the Dow Jones Industrial Average DJIA, -2.44% — which counts IBM as a component — is off 17%, the S&P 500 index SPX, -1.78% is down 12%, and the tech-heavy Nasdaq Composite Index COMP, -1.03% is down 4%.
IBM hopes that the addition of Red Hat’s software offerings and other changes can reinvigorate its business. “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,” Kavanaugh said on the call.
The analyst call was also the first for Arvind Krishna as chief executive, who took over earlier this month for Ginny Rometty.
On the call, Krishna said that more than 95% of IBM’s 350,000 person workforce was working remotely, with about 8,000 workers at essential sites.
“IBM, together with Red Hat, have unique sources of competitive advantage we can leverage to win the architectural battle for cloud,” said Krishna on the call.
Because of the uncertainty brought about by the coronavirus pandemic, the company said it was pulling its guidance for the year. In January, IBM had forecast adjusted earnings of “at least” $13.35 a share for 2020, while analysts expected $12.01 a share. “The company will reassess this position based on the clarity of the macroeconomic recovery at the end of the second quarter,” IBM said in a statement.
Cloud and cognitive software sales, which includes IBM’s Red Hat business, came in at $5.24 billion, while analysts had forecast a 5% rise to $5.3 billion. IBM said that Red Hat accounted for $1.1 billion in revenue, up 20% from a year ago, but that it was only allowed to report $719 million because of purchase accounting requirements.
Systems revenue, which includes mainframes, was $1.37 billion versus the $1.42 billion Street view.
Global technology services revenue came in at $6.47 billion while the Street expected $6.51 billion, and global business services revenue accounted for $4.14 billion in sales while the Street had forecast $3.91 billion.
Of the 19 analysts who cover IBM, five have overweight or buy ratings, 12 have hold ratings, and two have sell ratings, along with an average price target of $132.28.
