Earnings and sales decline, but revenue from cloud computing
increases by 30%
By Asa Fitch
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the U.S.
print edition of The Wall Street Journal (July 21, 2020).
International Business Machines Corp.'s earnings declined in the
second quarter against the backdrop of a pandemic that has roiled
many of its corporate customers.
Armonk, N.Y.-based IBM had been searching for growth under new
Chief Executive Arvind Krishna after several years of mostly
declining revenue under his predecessor, Ginni Rometty. Cloud
computing and artificial intelligence have become focal points in
recent years for the 109-year-old company, which became a corporate
mainstay with its mainframe computers and information-technology
services.
But IBM officials and industry analysts have said some companies
have been skittish about technology purchases with the economic
uncertainty caused by the coronavirus. The pandemic prompted IBM in
April to withdraw its full-year guidance. The company also laid off
thousands of employees in the past two months, spurred by both the
pandemic and a broader reorientation of its business.
IBM said Monday its second-quarter revenue fell by 5.4%, albeit
a smaller decline than Wall Street analysts were forecasting, to
$18.12 billion. Earnings per share also fell to $1.52 from $2.81 in
the same period last year. IBM increased its gross margins and beat
analysts' expectations for earnings on an adjusted basis.
Despite the rocky performance, IBM said its cloud-computing
revenue was $6.3 billion during the second quarter, up 30% from a
year earlier.
IBM's shares rose 4.5% in after-hours trading. The company's
share price has fallen 5.7% this year, compared with a slight gain
in the S&P 500.
IBM is one of the first big U.S. tech companies to report
results for the second quarter. Chip maker Intel Corp. reports
later this week, while Amazon.com Inc., Apple Inc., Google parent
Alphabet Inc. and Facebook Inc. report quarterly financial results
next week.
The U.S. technology sector has shown resilience in the
coronavirus era as more people work from home and use computer
hardware, software and internet services, but they haven't been
immune to such negative effects as a drop-off in advertising and
lower demand for smartphones.
IBM, for its part, sees a long-term opportunity amid the crisis
as clients accelerate their digital transformations, Mr. Krishna
said during a call with analysts. At the same time, some parts of
the company are taking a short-term hit, including software
businesses that rely on big transactions to grow.
"We're feeling the impact of austerity measures that businesses
have put in place to preserve cash and capital," Mr. Krishna
said.
Still, Chief Financial Officer James Kavanaugh said the company
was in a stable position given its wide global footprint and a
customer base that includes many resilient companies in critical
industries.
In recent months, IBM bolstered its cloud-computing business
despite the pandemic by signing deals with auto maker Daimler AG
and Indian telecom Bharti Airtel Ltd. Mr. Krishna said that there
were increasing opportunities for large and transformational
projects, but that they also "take time to shape and therefore to
close."
IBM wants to be a leading cloud-computing player, but it is
behind the competition, led by Amazon and Microsoft Corp., who make
money by renting out computing power to companies and consumers. It
is working to lead deployments of what it terms the hybrid cloud, a
technology model where companies do some of their computing work in
large external data centers but also maintain their own digital
infrastructure.
Last July, IBM closed its acquisition of open-source software
company Red Hat for $33 billion in a bid to bolster its
cloud-computing position. Red Hat's sales rose 17% in the quarter,
IBM said, although because of accounting rules, IBM can't report
all of Red Hat's revenue even though it has to absorb all its
costs.
IBM doesn't report how much money it makes in artificial
intelligence, its other area of focus.
As part of its turnaround efforts, IBM has shed or reorganized
parts of its business that don't align with its new mission. It has
been focusing recently on revamping its global technology services
division, which provides IT outsourcing and support services. Mr.
Kavanaugh said in April that moves to restructure that business
would result in nearly $2 billion of annual savings.
Technology services revenue in the April-to-June period was
$6.32 billion, down 8%. IBM has been trying to reverse the
division's revenue slide by refocusing it on cloud-computing
services. Cloud-related revenues within the division were up 18% in
the quarter, IBM said.
Among its other main segments, Global Business Services, which
focuses on consulting and other management services, made $3.89
billion of sales during the quarter, down 7%, IBM said. Its Cloud
and Cognitive Software division's revenues rose 3% to $5.75
billion.
Write to Asa Fitch at asa.fitch@wsj.com
(END) Dow Jones Newswires
July 21, 2020 02:47 ET (06:47 GMT)
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