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IBM Just Set the Tone for the IT Industry's Earnings Season

By Anders Bylund – Apr 22, 2020 at 7:11AM

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Hold on to your hats, folks. It's going to be a tough year, but some investment vehicles are better prepared for this rough road than others.

IT giant IBM (IBM 0.19%) set the tone for the entire IT industry in Monday evening's first-quarter earnings report. Big Blue showed us that the first quarter itself wasn't terrible, but a veritable Via Dolorosa lies ahead.

Q1 by the numbers

IBM's first-quarter sales fell 3% year over year to $17.6 billion. Earnings dropped 18% lower at $1.84 per share. That might sound rough, but the results actually measured up nicely to Wall Street's expectations. The company never issued official guidance for this specific reporting period but your average analyst had been looking for earnings near $1.79 per share on top-line sales in the neighborhood of $17.6 billion.

CEO Arvind Krishna said that the solid first-quarter results demonstrated the trust client place in Big Blue's technology and services, positioning the company for an "enduring" place of leadership in the hybrid cloud computing market.

So the first-quarter results largely lived up to expectations, led by contributions from recently acquired open-source software veteran Red Hat. Looking ahead, the sailing won't be smooth.

IBM typically updates its full-year guidance from one quarter to the next, but management chose to simply withdraw its guidance targets this time. The uncertain nature of the COVID-19 crisis made it impossible to draw up reasonable estimates for the rest of the year.

Close-up photo of a large cast-iron bell.

Image source: Getty Images.

"These are unprecedented times, and this quarter is not the time to declare that we have clarity," Krishna said in the earnings call. "That does not benefit us, and it does not benefit you as investors and analysts."

That being said, IBM did notice some changes in its customers' order patterns. What started as a normal first-quarter environment evolved into a tight focus on short-term needs in March.

"They moved ahead with spending that addressed immediate and essential needs, including running mission-critical processes and securing a remote workforce," said CFO Jim Kavanaugh. "In this environment, we are aligning our go-to-market and delivery resources to the near-term opportunity, addressing challenges like engaging customers virtually, modernizing and migrating applications to the cloud, empowering a remote workforce, and cybersecurity and IT resiliency."

Echoes around the industry

IBM's market analysis landed very close to the comments we got from German peer SAP (SAP -0.98%) on Tuesday morning and Indian rival Infosys (INFY -0.34%) earlier on Monday.

"We see increased interest from our clients in cloud virtualization, workforce transformation, and cost reduction programs," said Infosys CEO Salil Parekh. "We see near-term weakness across the board especially in the area of discretionary spending. Clients are focused on ensuring the safety of their employees and maintaining business continuity, while at the same time, conserving cash."

SAP co-CEO Christian Klein sketched out a weak demand picture in the current quarter, followed by an expected upturn in the back half of 2020. And the company takes its own advice, setting a strong example for current and potential clients.

"We see near-term weakness across the board especially in the area of discretionary spending. Clients are focused on ensuring the safety of their employees and maintaining business continuity, while at the same time, conserving cash," Klein said.

What this means for other IT titans

IBM, SAP, and Infosys saw customers tightening their purse strings, focusing on essential products and services as well as opportunities to cut short-term costs.

Expect more of the same when fellow IT behemoths Alphabet (GOOG -0.19%) (GOOGL -0.21%) and Microsoft (MSFT 0.13%) report earnings over the next couple of weeks -- solid results, difficult near-term business prospects, and a more stable outlook for products and services that provide an immediate cost-saving benefit to the customer.

Common themes will include cloud computing and platforms for remote work. Microsoft and Alphabet should do alright in this environment, keeping lots of these cloud-based productivity tools in their respective quivers. This looks like a great time to invest in blue-chip tech titans with diverse product portfolios.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Anders Bylund owns shares of Alphabet (A shares) and IBM. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), and Microsoft and recommends the following options: long January 2021 $85 calls on Microsoft and short January 2021 $115 calls on Microsoft. The Motley Fool has a disclosure policy.

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Stocks Mentioned

IBM Stock Quote
$125.74 (0.19%) $0.24
Alphabet (A shares) Stock Quote
Alphabet (A shares)
$101.43 (-0.21%) $0.21
Microsoft Stock Quote
$249.20 (0.13%) $0.32
Alphabet (C shares) Stock Quote
Alphabet (C shares)
$102.22 (-0.19%) $0.19
Infosys Ltd Stock Quote
Infosys Ltd
$17.64 (-0.34%) $0.06
SAP SE Stock Quote
$87.18 (-0.98%) $0.86

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