IBM the global IT business, reported disappointing results for the first quarter of 2020, with revenues declining by 3.4% to $ 17.57 billion.
There is a substantial degree of earnings see-through, following the Red Hat cloud acquisition, with currency volatility and corporate action, making it difficult to unpack the results.
However the future prospects of the company depends on its ability to synergize the Red Hat global cloud operations, and turn them around under the new management.
Recurring income in this area is a strength of this operation, with the new CEO, reporting a recurring revenue contribution of 60% from the cloud operations. The client base is focused on global Healthcare, telekom’s and the public service sectors, which appear to be relatively resilient in the current challenging economic environment.
Group results were also impacted, by the downturn in the software business segment, with enterprise customers delaying new business spend to focus on areas requiring more urgency.
Prior to the pandemic the group had free cash flow estimates of $12.5 billion, forecasting $1 billion growth from the Red Hat acquisition by the end of 2020.
IBM is undergoing a major transformation, from the days of the Big Blue, as it was known, being the bluest of blue chip companies, focused on a hardware, software, and servicing to a global corporate client base.
It has come too late to the party, facing strong competitors, such as Microsoft and Amazon , however the new higher margin operation will need to gather momentum, whilst a strong client base and global footprint should be a positive once the pandemic comes under control and revenue headwinds disappear next year.
The dividend yield of 5.5%, is attractive and the new management believes that the current level can be maintained, despite the fact that like a host of corporates, IBM has withdrawn 2020 profit guidance. The share price has been trading in a range of $119.50 with the current price of $123.00 reflecting that the quarterly dividend of $1.62 can be maintained. On a PE of 12.2x, it remains an attractive investment.