San Francisco This was not how Arvind Krishna imagined his entry. Born in India, he has been CEO of IBM. The disaster began in March. In the first two months of the year, IBM was still on target with its self-set goals. But then the full corona braking came.
IBM is the first company in the tech industry to present its figures. Giants like Microsoft, Amazon, alphabet, Alibaba or Oracle will follow. They will not be able to avoid every negative trend either.
On Monday, as expected, Krishna canceled all forecasts for 2020 due to the extreme uncertainty and at the same time emphasized the healthy balance sheet and financial situation of the company: “We will emerge from the pandemic more than we entered”, he promises to investors.
The cloud business is growing strongly. And the high dividend is also certain, he emphasizes. But Wall Street doesn’t want to hear about it at the moment. The stock plummeted by a good four percent.
March turned everything upside down. First, new business broke away because customers across the world suddenly changed their priorities. It was no longer about breaking into a new, digital millennium. Instead, the existing IT systems had to be prepared for the emerging corona crisis in an almost panic.
Within a few days, entire companies were converted to home offices that had never heard of them. IBM cites an insurer as an example, in which 40,000 employees were converted to remote work within a few days.
Overall, there have been clear shifts on the customer side. Above all, industries that predominantly rely on transactions, such as retail or car trading, suddenly saw themselves against nothing. Contracts have been canceled or not concluded.
Many contracts believed to be void
Financial institutions, payment processors, government organizations and important authorities in turn had to expand their IT in order to cope with the extreme increase in demand. For a children’s hospital in Atlanta, according to Krishna, IBM used the artificial intelligence “Watson”, for example, to set up a digital assistant to handle the countless calls from concerned parents. The system can answer over a thousand different inquiries. This greatly relieved the hospital and the staff.
But none of this was enough to compensate for the loss of contracts for business software that were actually believed to be safe. The industry traditionally brings contracts under wraps in the last two weeks of a quarter, said CFO James Kavanaugh. Now the signature dates had been canceled. Competitors Microsoft, Amazon, Google and Oracle may be affected.
The break-away was particularly noticeable among retail and automotive customers, it is said. But the CFO also emphasized that “around 70 percent” of IBM customers come from industries that, according to data from market researchers such as Gartner and IDG, are only “minimally” or “moderately” affected by Corona, such as credit card or utility companies.
In the end, from January to March, IBM had consolidated sales of $ 17.57 billion, compared to $ 18.18 billion a year earlier. Factset analysts had predicted $ 17.59 billion. Net earnings are reported at $ 1.18 billion, or $ 1.31 per share. Last year it was $ 1.59 billion, or $ 1.78 per share.
The new cloud division went particularly well with the acquisition of the software manufacturer “Red Hat”. $ 5.24 billion in sales are up five percent.
Red Hat had $ 1.1 billion in sales, which would have been an increase of 20 percent in isolation. But for accounting reasons, only 719 million of them can be reported, explains CEO Krishna. Nevertheless, the acquisition is still of crucial importance.
IBM relies on the “hybrid cloud”. Here, the old existing IT infrastructure is merged with new IT in a cloud. The US group believes that it can offer companies fast and affordable cloud solutions. IBM sees a potential trillion market in the hybrid cloud.
“Global Business Services” performed well with $ 4.14 billion. Analysts had expected $ 3.91 billion. For example, strategic advice, system integration and all programming work are summarized here. Services that are in demand now. All in all, however, was not enough to compensate for the failures in business software.
Even if IBM does not provide a forecast for the further course of business, the CEO remains cautiously optimistic. Recurring sales from long-term contracts now accounted for 60 percent of IBM’s business, ten years ago it was less than 50 percent.
In April, the CEO also points out, there were “no significant deviations” in the subscription business with software or services, Krishna encouraged in an interview with analysts. He feels “pretty good” with it. That’s why IBM maintains the fairly high dividend yield of over five percent. Krishna is “very confident” that she is not in danger.
IBM paid $ 1.4 billion in dividends in the prior-year quarter that were covered by free cash flow. In the twelve months to the end of March combined, total free cash flow was $ 11.6 billion.
Free cash flow not only pays dividends, but also share buybacks or acquisitions. IBM stopped buying back shares in mid-2019. Cash and cash equivalents were three billion dollars higher than last year. Such numbers are currently important to survive in these times.
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