IBM sees shift in client spend priorities, withdraws annual forecast

(Reuters) – International Business Machines Corp’s (IBM.N) clients have shifted priorities toward saving capital in recent weeks because of COVID-19, hitting software sales in particular, new Chief Executive Officer Arvind Krishna said as the company withdrew its 2020 annual forecast.

The company’s shares fell about 3.3{3c4481f38fc19dde56b7b1f4329b509c88239ba5565146922180ec5012de023f} in after-market trading.

Krishna said the shift to remote work is accelerating the move towards cloud services offered by IBM. The company’s hybrid cloud offers combined management of on-premises and remote computers for clients.

Executives said most IBM customers were relatively well positioned for the pandemic and the company would continue to pay dividends.

The company posted quarterly revenue slightly lower than Wall Street expected, but beat profit targets as sales in its high-margin cloud computing business rose 19{3c4481f38fc19dde56b7b1f4329b509c88239ba5565146922180ec5012de023f}.

IBM has ample free cash flow and liquidity to invest in its business and continue paying dividends, Chief Financial Officer James Kavanaugh told Reuters.

“We’ve done many different stress tests of our business model, running multiple scenarios around the uncertainties of the duration of the health crisis, but also the rate and pace of recovery around the world”.

Kavanaugh said 70{3c4481f38fc19dde56b7b1f4329b509c88239ba5565146922180ec5012de023f} of IBM’s revenue is made up by industries that are predicted to be moderately or minimally impacted by the virus outbreak, including healthcare and telecommunications.

Big Blue is the first U.S. tech major to report quarterly results for the period ending March 31, during which the country’s economy was badly hit as the pandemic kept people indoors.

“Our near-term performance will ultimately be influenced by client buying patterns in this economic environment,” Kavanaugh said.

IBM for several years has been focused on becoming a major player in the cloud services industry, acquiring Linux maker Red Hat and selling some legacy businesses.

Revenue from the cloud business, previously headed by IBM’s new boss Krishna, rose 19{3c4481f38fc19dde56b7b1f4329b509c88239ba5565146922180ec5012de023f} to $5.4 billion in the first quarter.

Krishna took over the chief executive officer role from Ginni Rometty in April, while appointing former Bank of America Corp’s (BAC.N) top technology executive Howard Boville as the new head of IBM’s cloud business.

IBM’s total revenue fell 3.4{3c4481f38fc19dde56b7b1f4329b509c88239ba5565146922180ec5012de023f} to $17.57 billion in the reported quarter, slightly below analysts’ estimates of $17.62 billion, according to IBES data from Refinitiv. Excluding the impact from currency and business divestitures, the company recorded a marginal growth in revenue.

Net income fell to $1.18 billion, or $1.31 per share, in the quarter ended March 31, from $1.59 billion, or $1.78 per share, a year earlier.

On an adjusted basis, the company earned $1.84 per share, above estimates of $1.80 per share.