IBM's Q2 tapered by pandemic business recovery

IBM has reported revenue for the second quarter of 2020 of $18.1bn, down 5.4% compared to the same period in 2019.

The company grew its cloud business by 30% to $6.3bn, while Red Hat, which IBM acquired for $34bn in July 2019, reported a 17% increase in revenue.

Cloud & Cognitive Software, which includes IBM’s cloud and data platforms, Red Hat, cognitive applications and transaction processing platforms, posted revenues of $5.7bn, up 3%.

Global Business Services, which includes IBM’s consulting, application management and global process services businesses, reported revenues of $3.9bn, down 7% due to declines in application management and consulting.

IBM’s Global Technology Services business, which includes infrastructure and cloud services and technology support services, reported revenues of $6.3bn, down 8%.

Its Systems business, which includes systems hardware and operating systems software, reported revenues of $1.9bn, up 6%.

While IBM continues to promote its hybrid cloud approach to application modernisation, according to the transcript of the earning call posted on the Seeking Alpha financial blogging site, its customers appear to be buying less IT due to the impact of the coronavirus pandemic.

In the earnings call, CEO Arvind Krishna said: “We are seeing that there is a negative on things that require capex [capital expenditure], things that have very long-term pay-offs, and project-based businesses. If we think about the difference in third and fourth quarters, third is a bit lighter on transactions, fourth is very heavy on transactions. It’s likely that we see that the economic recovery is looking to be longer and more protracted than we might have hoped for back in March.”

While the company posted strong growth in its cloud business, among the challenges IBM faces, according to Krishna, is that its customers have “the ability to dial volumes up and down in some range”. While this enables them to match the cloud services they need to the health of their business, it does mean it makes it far more difficult for IBM to predict how much each customer will likely buy.

During the earnings call, IBM’s chief financial officer (CFO) Jim Kavanaugh described how the impact of the pandemic in individual countries affected IBM’s services business, which suggests some projects that have been put on hold during coronavirus lockdown measures have not been restarted.

“Our GBS business really stalled in the month of March after starting very strong through two months. That continued through the first two months of this quarter. In June, we saw our small transaction volume, which has high yielding revenue content going forward, actually come back to growth. It was led by Europe, which stabilised with their pandemic curves, and Asia-Pacific,” said Kavanaugh.

“The Americas were the exact opposite – both Latin America and the US. We started out pretty strong as the US was getting the pandemic ‘in curve’ underway and then when it started bouncing in June, and we took a big step back.”

Discussing the company’s application modernisation push and its systems division, which includes the Z-series mainframe, CCS Insight research director, Bola Rotibi, said: “This quarter has seen a lot more push from the other cloud hyperscalers in trying to attract customers to migrate their core mission-critical applications to cloud based operations. 

“Google acquired Dutch-based mainframe to cloud migration specialist and has already started messaging the benefits of making that move. With mainframes being at the centre of many core mission-critical operations, and the high-profile troubles experienced by some government units with their mainframe systems, it seems that it is open season for making a big push to try and move clients away from their mainframe investments. 

“IBM has not been idle and has evolved its mainframe platform to operate effectively as a first-class asset for cloud, so it will be interesting to see if it is doing enough to remain compelling to its customer base and prospects and stem any defection.

“Also, the dynamics of the mainframe market has seemed a lot little bit more active recently with Broadcom’s CA portfolio and BMC’s acquisition of Compuware for its mainframe assets.”