IBM Corp. reported first-quarter earnings that beat consensus revenue on earnings that were in line with expectations, indicating that the impact of the COVID-19 pandemic has not hit tech firms’ bottom lines — at least not yet.

However, the company also withdrew earlier full-year 2020 guidance because of the crisis and said it will “reassess this position based on the clarity of the macroeconomic recovery at the end of the second quarter.”

“It was a tough decision to withdraw guidance, but this is not the quarter to declare clarity,” said Arvind Krishna (pictured), who assumed the chief executive position at IBM just two weeks ago.

Company officials exuded confidence about the future, saying that their cash position is strong, cash flow is positive and the recurring revenue stream is growing. But it’s clear that the pandemic is changing customer behavior.

Krishna noted that “in the last few weeks we faced a shift in client priorities toward preservation of capital.” But he said that in the long term that bodes well for the company’s strategy, which is focused on hybrid cloud and artificial intelligence. “The current crisis will cause us to accelerate what we are already doing.”

As the first enterprise technology company to report earnings this quarter, IBM’s results will be carefully watched by investors as a sign of things to come over the next few weeks. “They were clear that sales were impacted in March and that’s what I think we’ll hear from everybody else,” Nucleus Research Inc. CEO Ian Campbell said.

Expect to see similar patterns from other tech companies that will report results over the next few weeks, said Bola Rotibi, research director for software development at CCS Insight Ltd. “They started the quarter solidly, got growth in the areas where you’d expect but then in March clients were just focused on protecting their cash flow,” she said. “I think this is an indicator of where the market is going.”

Campbell said the company’s competitive position is fundamentally sound. “Every company on the planet is going to be looking for ways to economize and IBM is well-positioned to take advantage of the turnaround,” he said. “The question is when that’s going to happen.”

A ‘bright spot’

Pund-IT Inc. Principal Analyst Charles King called the results “a bright spot in a mostly troubled market,” and said IBM’s decision to withdraw full-year guidance was sensible. King also believes the company is as well-positioned as any for the long term. “IBM’s investments in cloud computing should help the company prosper as customers ramp up cloud usage to offset on-premises data center expenses,” he said.

Earnings of $1.84 per share were four cents better than consensus estimates. Revenues fell 3.3% year-over-year, to $17.57 billion, slightly below the $17.62 billion analysts expected.  However, executives said that when currency fluctuations and divestitures were factored out, the company had unspecified “modest revenue growth.”

On a product line basis, Cloud & Cognitive Software rose 7%, to $5.2 billion, adjusting for currency fluctuations. Global Business Services Revenue grew 1%, to $4.1 billion, Global Technology Services fell 4%, to $6.5 billion, and Systems revenue grew 4%, to $1.4 billion.

IBM stock fell a little over 1% in after-hours trading. It’s than 20% off its 2020 high of $157.69 but up more than 30% from its March 23 low of $90.56. The stock performance parallels that of competitors like Hewlett Packard Enterprise Inc. and Dell Technologies Inc. But it’s worse than that of Microsoft Corp., which has benefited both from a strong cloud computing business and from investor expectations that the pandemic-fueled shift to work-from-home conditions may boost its desktop software business.

Software is the biggest uncertainty going forward, executives said. “We have a solid pipeline of deals but our software performance will depend on how we yield against that pipeline,” said Chief Financial Officer James Kavanaugh. Server and storage sales were strong in the quarter, led by IBM Z-series mainframe growth of 61% and a 19% jump in storage revenue. Those gains were offset, however, by slower sales of IBM Power systems, which are aimed at smaller customers.

Like most companies making the switch to a cloud revenue base, IBM is shifting from license to subscription software models. The company said 50% of its revenue is now recurring and thus more predictable. “That’s good,” said Nucleus’ Campbell. “The bad news is that 50% isn’t.”

This quarter marked the first appearance by an IBM chief executive on an earnings call in recent memory. Former CEO Virginia Rometty had delegated that responsibility to IBM CFOs for the past five years. Pund-IT’s King said that’s a notable development.

“I was impressed by Krishna’s financial transparency during the call,” he said. “He’s a deeply experienced, insightful and respected executive with a long history of business successes.”

Krishna, who began his IBM career as an engineer, is the company’s first CEO in decades to come from a technical rather than a sales or financial background, a fact that appealed to CCS Insight’s Rotibi. “He’s come out of the gate saying we’re a technical organization and we’re going to be pushing on our architectural strength,” she said. “I though that was quite good to hear.”

Photo: SiliconANGLE