IBM stock slips as software sales slumped in March due to coronavirus

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International Business Machines Corp. stock slipped in the extended session Monday after the tech giant reported its revenue returned to a decline in the first quarter as the spread of COVID-19 hit software sales heavily in March and pulled its annual forecast for now.

“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.”

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.

“With that, there was effectively a pause, as clients understandably dealt with their most pressing needs,” Kavanaugh said. “This was most pronounced in our software business, where the vast majority of transactions typically close-in the last two weeks of the quarter.”

Kavanaugh elaborated that IBM got “hit” on cognitive applications and on its transaction processing businesses, which are used heavily by retailers and the automotive industry. The CFO also noted that 70% of its clients are industries that are considered to be “minimally” to “moderately” impacted by COVID-19, according to data from research firms Gartner and International Data Group.

IBM IBM, +0.24% shares declined more than 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 13%, and the tech-heavy Nasdaq Composite Index COMP, -1.03% is down 5%.

IBM has pinned its hopes on the addition of Red Hat’s software offerings and other changes to 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. Earlier in the month, Krishna took over the CEO role from 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, and that business was not dropping off in the new quarter.

“We haven’t seen, at least so far, any big change in the subscription side coming into April,” Krishna said on the call, noting that “we feel quite good about” subscriptions because they tend to cover mission-critical workloads so they would be the last things to be affected by the pandemic.

”Now, on the transaction side, so far things are holding up but it’s too early to tell,” Krishna said.

Given 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 said it will reassess on whether to provide an outlook at the end of the second quarter.

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.

Originally Published on MarketWatch

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