International Business Machines reported a drop in first-quarter revenue and pulled its profit forecast for the year, signaling that the COVID-19 pandemic has become another hurdle for the company in its transition to cloud computing.
Sales declined 3.4% to $17.6 billion in the period that ended March 31, the Armonk, New York-based company said Monday in a statement. Analysts, who recently updated their projections to adjust for the pandemic, expected revenue of $17.7 billion, according to data compiled by Bloomberg.
New CEO Arvind Krishna, who took the reins from Ginni Rometty earlier this month, has the challenge of leading the 108-year-old tech giant through the economic shocks stemming from the coronavirus. Many organizations have delayed major information technology purchases to avoid projects that are expensive, complex and sometimes disruptive to existing business processes. Even before the coronavirus emerged, IBM had struggled to increase sales on a consistent basis.
“This announcement shows Arvind Krishna needs to do a little more than just stay on track,” Ian Campbell, CEO of Nucleus Research, said in an interview.
The company has been trying to boost its share of revenue from hybrid-cloud software and services, which lets customers store data in private servers and on multiple public clouds, including those of IBM rivals Amazon.com and Microsoft IBM bought RedHat for $34 billion in 2018 to boost this effort. It has also heavily promoted its Watson artificial intelligence systems.
“For the next few months, we have to be focused on the stability of the business and be sure we preserve our liquidity and balance sheet,” Krishna said on a conference call with analysts, becoming the first IBM CEO in decades to join an earnings call. Moving forward, the focus will be on hybrid cloud and AI, with quantum computing “coming down the road,” he added.
Shares fell about 3% in extended trading after closing at $120.41 in New York. The stock has declined 10% this year.
IBM saw a sales slowdown in cognitive software in March as the pandemic took hold and the economy wound down. In the near-term, the company expects that clients will postpone projects, particularly involving software, while demand for hardware should remain stable, executives said on the call. Earlier this month, German software maker SAP reported a similar downturn in cloud licenses.
Earnings, excluding some costs, were $1.84 a share in the quarter, compared with the average analyst estimate of $1.81. IBM is on target to trim expenses by $2 billion this year, Chief Financial Officer Jim Kavanaugh said on the call.
The technology giant reported cloud revenue increased 19% to $5.4 billion in the first quarter. That increase was driven by Red Hat, which contributed $719 million to IBM’s sales in the period, after a financial adjustment related to the acquisition. IBM uses a broad definition for cloud computing, which includes applications, infrastructure and professional services such as consulting into its reporting.
Global Technology Services, which represents about 37% of IBM’s total revenue, continued to decline. The technology consulting unit had sales of $6.5 billion, which is down 5.9% from the same period last year. Global Business Services also narrowly declined, to $4.14 billion — less than a percentage point from a year earlier.
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