IBM Q1 2020 earnings call highlights: withdraws 2020 outlook amid COVID-19 crisis

At a time when the technology sector is getting battered by the COVID-19 crisis, IT behemoth IBM (NYSE: IBM) reported its first-quarter 2020 financial results yesterday under the reins of the new chief executive, Arvind Krishna. While IBM’s non-GAAP earnings of $1.84 per share in the first quarter surpassed analysts’ estimates, the revenue of $17.57 billion lagged the targets. Like other US companies, IBM also pulled back from its full-year 2020 outlook citing the coronavirus impact.

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Clients’ behavior

In his first earnings call, Arvind Krishna who replaced Ginni Rometty as CEO early this month said that in the last few weeks of the first quarter, priorities of the clients shifted towards preserving their capital as a result of the global health crisis. These clients focused on stabilizing their operations and preserving cash. Clients’ pressing needs including shifting to remote work, automation and application modernization are expected to accelerate the client shift to hybrid cloud.

Looking at the first quarter, through February we were tracking roughly in line with our expectations. As we got into March, the health situation and resulting social distancing became more widespread. As you would expect, we saw a noticeable change in client priorities. With that, there was effectively a pause as clients understandably dealt with their most pressing needs.

As the impact of COVID-19 intensified in March, clients began to deprioritize some of their projects. In this environment, the company deployed its resources to engage customers virtually, modernize and migrate the applications to the cloud, empowering a remote workforce with cybersecurity and IT resiliency. The company expects its Global Business Services customers to continue to delay and replan some of their projects in the near term.

In the Global Technology Services business, IBM expects to have some impact due to lower business volumes, which will accelerate the shift of mission-critical workloads to the hybrid cloud.

Financial position

The company, which closed Red Hat acquisition last year, said that it has ample free cash flow and liquidity to support the business and secure its dividend.

We have over $15 billion of unused credit facilities. And while we have no plans to draw on the facilities, they are available as back-up liquidity, and our debt covenants are well within the required levels. And with our share repurchase program suspended since the Red Hat acquisition, our overall shareholder payout remains at a comfortable level and we remain fully committed to our dividend.

Over the past 20 years, IBM has bought back $140 billion of its stock.

Its current market cap: $105 billion. $IBM pic.twitter.com/oSj9op1Dre

— Charlie Bilello (@charliebilello) April 21, 2020

Outlook

IBM withdrew its earlier profit outlook for the full-year 2020 given the uncertain environment in the wake of the COVID-19 crisis. The company said that with better clarity on the economic recovery it will reassess the situation and will give an update at the end of the second quarter of 2020. When IBM announced fourth-quarter 2019 results in January, it had projected GAAP EPS to be at least $10.57 and non-GAAP EPS to be at least $13.35 for fiscal 2020. The company expects the second quarter to be more challenging if the customers continue their same buying pattern.

Since the crisis began, we’ve been stress testing our model, and running number of scenarios based on various assumptions. Given the level of uncertainty around the duration of the health crisis, and the rate and pace of economic recovery, there is a wide range of outcomes for the year, which we are prepared for. But to assign probabilities to the assumptions during these unprecedented times just isn’t valuable. As a result, it is prudent to withdraw our expectations for full-year 2020, and we will reassess at the end of the second quarter.

Acquisitions

In his prepared remarks, CEO Arvind Krishna said that the management will continue investing, including acquiring properties that are attractive, but that fits the company’s strategy. When answering a question on acquisitions, he stated that the size is not a criterion. He added that those properties need not be accretive on month one or day one, but be accretive after a year or two. He added that the properties that add the company’s values in the hybrid cloud and AI will fall under the required criteria.

IBM stock, which plunged to a yearly low ($90.56) on March 23, dipped 3% today.

Read IBM Q1 2020 full earnings call transcript