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IBM Vows to Change “Culture and Operating Model” as Profits Plunge

"Many clients continued to delay projects, defer purchases and favor opex over capex spending in this environment"

By CBR Staff Writer

IBM returned $1.5 billion to shareholders in dividends in Q2 — even as its net income plunged 46% year-on-year — increasing its dividend for a twenty-fifth consecutive year.

The decision came even as Big Blue declined to provide guidance for 2020 in its earnings — despite rivals like Accenture, Oracle, and SAP doing so — saying there remained too much volatility in the market to accurately assess its outlook.

IBM is carrying $65 billion in debt, with total assets on its balance sheet for June 2020 of $154 billion. Net income for Q2 was $1.3 billion.

“Many clients continued to delay projects, defer purchases and favor opex over capex spending in this environment” CEO Arvind Krishna noted.

“This pause in large purchases and discretionary spending was most evident in our perpetual software licenses and project work”.

CFO Jim Kavanaugh added on an earnings call: “While performance in some of these industries, like financial services, was consistent quarter-to-quarter, other industries had a more significant decline. We saw this especially in retail, automotive, consumer goods and travel and transportation.”

Shares were up as quarterly revenues of $18.1 billion beat market expectations, with cloud revenues continuing to grow strongly.

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IBM Outlook: Big Blue Focussed on “Changing Operating Model”

CEO Krishna hinted at significant internal organisational shifts, saying: “We are focused on changing our culture… so we can make decisions more quickly and make our interaction with clients a lot more experiential.”

“We are also working to fundamentally shift our operating model.

“We’re simplifying the geographic dimension of our go-to-market by consolidating our operations and moving to a streamlined structure for sales teams to be more flexible and responsive to our clients.

He added: “We’ve enhanced our virtual selling capabilities, including co-creation with clients on virtual platforms… and shifting to contactless delivery even for the most complex transformation projects.

Big Blue’s Red Hat acquisition continues to pay off meanwhile, giving the company “net new” opportunities including in the telco space.

Red Hat was “growing nicely at an 18% historically normalized basis here in the second quarter”, CFO Jim Kavanaugh acknowledged, with that growth powering IBM to a 34% rise in cloud revenue quarter-on-quarter.

He added on an earnings call: “We now have over 2,400 clients using our container solutions and nearly 600 IBM services clients utilizing Red Hat technology.”

(IBM has emphasised a major shift to hybrid cloud delivery).

IBM Outlook: “Slightly Shielded” by Large Footprint

CCS Insight Director Bola Rotibi said: “The long and short of it, is that the company is running steadily (and in some business units doing very well) despite the challenging business environment…

“With a market footprint in 170 countries accounting for 70% of its revenue, it has meant that it has been slightly shielded as a result of being able to offset losses in countries where the pandemic is not under control with those countries where it is now under control with the workforce starting to return. Crucially it has 60% recurring revenue as an additional cushion.”

She added: “Competitively, IBM is in a tough market with key competitors like Google, AWS and Microsoft jockeying to migrate mission-critical workloads to the cloud platform. All have competing solutions to each other’s DevOps/Kubernetes/ hybrid cloud management and support tools.

“However, IBM has played it well with its Chapter 2 narrative which centres on the move to drive more mission-critical workloads into the cloud but accepting hybrid IT will be the reality with the continuation of on-premise operations. This has chimed well within markets upended by COVID-19 with organisations now rushing to digitally transform quickly so that they can operate better in the hybrid workplace.”

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