IBM (IBM) Q1 2020 earnings preview: COVID-19 impact, outlook to be in focus

IBM (NYSE: IBM) is scheduled to report first quarter 2020 earnings results on Monday, April 20, after the market closes. Analysts have estimated earnings of $1.81 per share, which is down compared to $2.25 per share reported a year ago. Sales are expected to decrease 1.8% to $17.8 billion.

This earnings announcement will be quite a noteworthy one since it is the first since Arvind Krishna took over as CEO and also due to the ongoing coronavirus pandemic and its impact on business operations.

IBM has seen continued strength in its cloud computing business and in its security and AI-related solutions. Last quarter, cloud revenue improved 23% and represented 27% of total revenue. The company had stated at the time that the next chapter of cloud will be driven by mission-critical workloads managed in a hybrid multi-cloud environment.

The company is also seeing synergies from its Red Hat acquisition. Red Hat’s normalized revenue rose 24% last quarter, eclipsing $1 billion in a quarter for the first time. IBM also saw strong performance in its cloud-native software Cloud Paks, which brings together IBM’s middleware, AI, management and security, and Red Hat’s OpenShift platform.

However, it remains to be seen how much of an impact the COVID-19 pandemic has had on IBM’s business operations, particularly in terms of deal wins. IBM has partnered with the government and other industry leaders to provide resources and technology to fight the virus.

The outbreak has taken a toll on the financials of most companies causing them to lower their spending plans and this might lead to reduced investments in technology which could hurt IBM. On the flip side, as more people work from home and conduct affairs online, IBM’s solutions could see demand. There is also the possibility that firms might not defer essential investments in cloud required to keep their businesses running smoothly.

IBM has been investing significantly to improve its cloud capabilities and these costs are likely to weigh on the bottom line this quarter. The company also faces tough competition in the cloud space.

Last quarter, IBM guided for GAAP EPS of at least $10.57 and adjusted EPS of at least $13.35 for full-year 2020. In light of the pandemic, any updates to this outlook is an important area to watch.

IBM’s shares have gained 24% in the past one month.