The world that existed when I worked for IBM was very different than the world I’ve lived in this last decade. If anything, the world we have now is even more different than the world we had last year. IBM’s executive leaders began to pivot IBM over a decade ago, anticipating the eventual coming of this new normal. Still, I doubt they realized how quickly the pivot would come. Fortunately, most of the foundational work was done to shift IBM before this year, and as a result, IBM has been able to weather this storm relatively well.
Top and bottom-line results beat estimates with earnings of $18.1B vs. the $17.72B estimate, and EPS of $2.18 vs. the $2.09 estimate. Beating estimates during a quarter rolling into a pandemic shutdown was undoubtedly not easy, but it showcases that IBM’s pivot was well timed.
Let’s look at IBM’s financials this week in the context of the post-pandemic world.
Looking underneath IBM’s financials
Looking at IBM’s results, you can tell a lot about this new world in which we find ourselves. IBM is a good bellwether because the global firm covers innumerable industries. About 70% of IBM’s revenue comes from Financial Services, Telecom, government, and healthcare.
There has been a massive shift from on-premise purchases to Cloud Services. IBM’s revenues were consistent with this, with a significant increase in cloud revenues of 30% for the quarter (20% for the year). With people working from home, installing—let alone maintaining, on-premise hardware has become problematic, so outsourcing to the cloud became a fast way to address the firms’ needs without putting employees at significant risk.
Services showcased that while transformational projects and hardware replacements were once down, they are again ramping up as firms get some of their folks back to work and attempt to pivot themselves to a somewhat-steady state. Even though this news looked good, IBM wasn’t comfortable doing an outlook, likely because COVID-19 is far from over and much of the market is in flux.
IBM’s acquisition of Red Hat was fully vindicated with Red Hat revenue up 17% during a quarter when many industries like transportation and hospitality were mostly shut down. Looking under the numbers, it was clear companies were trying not to incur additional debt and favoring Operating Expensive over Capital Investments because of the uncertainty. Looking forward, Red Hat’s backlog grew $4.6B, suggesting the current quarter should also be very strong for this pivotal new part of IBM.
Hardware was fascinating—I expected Power to continue to slide because of a lack of people available to install new servers. But what was surprising was that System Z was up 6%, which suggests that firms are updating their old hardware to improve reliability and implement automation options.
Wrapping up: Focusing on the basics
Overall, IBM’s clients appear to be focusing on mission-critical processes, operational stability, and cash preservation during this period, and I’d expect that to continue. I’d also expect that digital transformation (I’m not a fan of the term because it talks about the process, not the real goal) to continue to be popular, given the critical need to automate due to on-premise staffing issues.
As we continue this new pandemic normal, I’d expect purchases to continue to be mostly tactical (focus on OpEx over CapEx) because the future is so uncertain. I’d expect IBM to continue to focus on Web Services and automation and continue to seek out opportunities to automate because staffing remains an unreliable resource—at least at company headquarters and plant sites.
Talking about IBM, I would also look for increased revenues going toward IBM’s cognitive resources, which are core to IBM’s automation offerings now that firms understand the risks and can better justify the automation expenses.
This new normal is taking some time to get used to. Still, IBM’s numbers suggest companies are getting the hang of the new normal and what appears to be a coddiwomple (travel in a purposeful manner towards a vague destination) strategy.