I don’t usually look at IBM financial quarters, I tend to be more focused on the tech and the wellbeing of the people using tech – and quite often on the choices facing decision-makers about which tech to buy – however, this quarter, the results are interesting in that they show just how much even major tech companies are affected by world events and the mood of the market.
Let’s look at the headlines. The figure for sales was $15.54 billion, which is up from $14.22 billion in the corresponding quarter last year. Although, bear in mind that the figures have been adjusted to allow for discontinued operations – in this case it’s mainly for Kyndryl, the managed infrastructure-service business, which was spun off.
As you’ll remember, IBM began selling its z16 mainframes during the quarter, which lead Z systems sales to jump 69%. In the previous quarter, sales had declined by 19%.
The figure for net income was $1.39 billion, or $1.54 a share. This figure is also up from the same period last year of $1.47 a share. The adjusted earnings per share, which exclude stock-based compensation expenses and other items, were $2.31. Again, this is up from $2.23 in the same quarter of the previous year.
And yet, on the day that the figures were announced, IBM’s stock dropped 6.4% on Wall Street.
IBM, which earns a lot of its revenue overseas, has been hit by the fact that the US currency has surged to its highest level in 20 years recently. The dollar is strong because the Federal Reserve was quick to raise interest rates in an effort to cool inflation. Higher interest rates typically attract foreign investors, driving up demand for the currency. The downside for companies like IBM is that it suffers in sales abroad because the strong dollar lowers the value of its international sales and makes them less competitive compared with potential local rivals, and, of course, companies offering alternatives to mainframes.
The war in the Ukraine is also having an impact. IBM management has called for $10 billion in free cash flow for all of 2022. This figure is down from the range of $10 billion to $10.5 billion that IBM provided in April. Part of the reason for this change was IBM suspending its business in Russia, which it did because of Russia’s invasion of the Ukraine. The business in Russia has been highly profitable for IBM.
Looking at some of the results in more details, we can see that hybrid-cloud revenues were up 18% to $5.9 billion in the quarter. Software unit revenue increased 6.4% to $6.2 billion, which wasn’t as much as people had estimated it would be. Whereas consulting sales beat the estimates increasing by 10% to $4.8 billion. Red Hat sales increased by a disappointing 12%. Disappointing because it was the lowest increase since IBM acquired Red Hat in 2019. A significant portion of IBM’s revenue came from sales to Kyndryl.
The gross margin was 53.4%, which was ahead of the 52.9% expected, but not as good as last year’s figure of 55.2%. The decline has been attributed to increasing labour costs and also the increase in the price of components. This a problem that businesses in many countries are facing following the pandemic and with the world situation as it is.
So, it’s clear that large corporations like IBM can be working their socks off to ensure that they have a good product to sell and that they are able to sell their products across the globe, however, they are still subject to all the same pressures as other companies – like inflation, high interest rates, high labour costs, high component costs, a post-pandemic world, and war in the Ukraine – a country usually referred to as the breadbasket of Europe. Each of those issues, or their immediate aftermath, will still be with us at the end of the next quarter. One can only wonder at impact those issues will have on small and some medium-sized companies, and whether they can successfully remain in business. And one must wonder what the fall out will be on the global economy if those companies do start to collapse.
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