IBM's first-quarter performance exceeded expectations, but investors are concerned about tariffs and the impact of DOGE, leading to a drop of over 6% in after-hours trading | Earnings Report Insights

IBM announced its earnings report after the market closed on Wednesday, showing that the company's first-quarter performance exceeded analysts' expectations, with revenue increasing by 1% instead of declining, and the second-quarter revenue guidance above expectations. However, due to concerns that its earnings report did not alleviate investors' worries about tariffs and potential cuts in U.S. federal government spending affecting the company's business, the stock fell more than 6% in after-hours trading.

Here are the key points from IBM's first-quarter earnings report:

Key Financial Data:

Revenue: IBM's first-quarter revenue was $14.5 billion, a year-on-year increase of 1%, and a 2% increase when calculated at constant currency.

Gross Margin: IBM's first-quarter gross margin was 55.2% according to GAAP, an increase of 170 basis points; on a non-GAAP operating basis, it was 56.6%, an increase of 190 basis points.

Pre-Tax Profit Margin: IBM's first-quarter pre-tax profit margin was 8.0% according to GAAP, an increase of 50 basis points; on a non-GAAP operating basis, it was 12.0%, an increase of 50 basis points.

Operating Profit: IBM's first-quarter operating profit was $1.05 billion, equivalent to earnings per share of $1.12.

Adjusted Earnings Per Share: IBM's first-quarter adjusted earnings per share were $1.60, higher than analysts' expectations of $1.42.

Cash Flow: IBM's first-quarter net cash generated from operating activities was $4.4 billion; free cash flow was $2 billion.

Segment Data:

Software Business: Revenue was $6.3 billion, a year-on-year increase of 7%, and a 9% increase when calculated at constant currency:

• Hybrid Cloud (Red Hat) grew by 12%, a 13% increase at constant currency.
• Automation business grew by 14%, a 15% increase at constant currency.
• Data-related business grew by 5%, a 7% increase at constant currency.
• Transaction processing business was flat, a 2% increase at constant currency.

Consulting Business: Revenue was $5.1 billion, a year-on-year decrease of 2%, flat when calculated at constant currency:

• Strategy and technology consulting decreased by 3%, a 1% decrease at constant currency.
• Intelligent operations decreased by 2%, flat at constant currency.

Infrastructure Business: Revenue was $2.9 billion, a year-on-year decrease of 6%, a 4% decrease at constant currency:

• Hybrid infrastructure decreased by 9%, a 7% decrease at constant currency.

• IBM Z decreased by 15%, a 14% decrease at constant currency.

• Distributed infrastructure decreased by 5%, a 4% decrease at constant currency.

• Infrastructure support services decreased by 3%, flat at constant currency.

Financing Business: Revenue was $200 million, a year-on-year decrease of 1%, a 2% increase at constant currency.

Performance Guidance:

Full-Year Revenue Expectation: The company maintains its expectation for full-year revenue (calculated at constant currency) to grow at least 5%. At current exchange rates, foreign exchange is expected to have a positive impact of about 1 to 1.5 percentage points on full-year revenue growth

Second Quarter Revenue: The company expects second quarter revenue to be between $16.4 billion and $16.75 billion, higher than analysts' expectations of $16.3 billion.

Free Cash Flow Expectations: The company continues to expect full-year free cash flow of approximately $13.5 billion, slightly lower than analysts' expectations of $13.6 billion.

Evercore ISI analyst Amit Daryanani stated in a media interview that IBM performed strongly during the recent market turbulence due to tariff issues, leading to "investor expectations for a nearly perfect earnings report," but the results did not fully satisfy.

IBM's stock fell over 6% in after-hours trading. Despite the broader market declining in recent weeks, IBM is still viewed as a relatively safe haven, with its stock price up 12% year-to-date, while the S&P 500 index has dropped 8.6% during the same period.

Currently, IBM is working to transform from a traditional computer company to one focused on high-growth software and services. The company is continuously expanding its product line through acquisitions, including the completion of the acquisition of HashiCorp in February this year and the $4.6 billion acquisition of Apptio in 2023.

IBM stated that since mid-2023, the contract value of its artificial intelligence consulting and software business has exceeded $6 billion, up from the $5 billion disclosed in the quarterly earnings report in January this year. About 80% of this comes from the consulting division, with the remainder from the software business.

IBM CEO Arvind Krishna stated on the conference call:

"Despite rapidly changing market sentiment and operating environment, our performance continues to reflect the success of our focus on hybrid cloud and artificial intelligence strategies, especially as customers seek to reduce costs, improve productivity, and need reliable partners for rapid scaling."

"These customer demands remain critical in the current market. Before further discussing our performance, I want to emphasize our recognition of the government's focus on economic growth and rational regulation, which will enhance the global competitiveness of the United States and help technology better facilitate economic development."

IBM CFO Jim Kavanaugh stated that the quarter's performance reflects the "resilience and pressure resistance" of IBM's business. He noted that the current uncertainty in the macroeconomic environment is prompting companies to rethink their spending strategies to achieve the best investment returns.

Kavanaugh mentioned that this shift could be beneficial for IBM. He said:

"In a highly volatile and uncertain environment, customers are more focused on cost efficiency, cash reserves, and liquidity, and our automation product portfolio aligns well with this demand."

The earnings report showed that consulting business revenue decreased by 2% year-on-year, totaling $5.07 billion. Kavanaugh pointed out that although sales in the consulting business have declined, the overall situation has stabilized. He noted that the decline in the consulting division is mainly due to companies reallocating resources from discretionary projects. However, he remains optimistic about IBM's leading position in the artificial intelligence field, believing it will yield long-term returns

"Our key is to continue to win the market where we have established an early lead in the field of generative AI. We are at the forefront of this technology curve."

In addition, infrastructure business revenue fell by 6% to $2.9 billion. Analysts believe that the decline in infrastructure business is partly related to the product cycle. IBM is currently at the end of a three-year product cycle, and the company plans to release the next-generation z17 mainframe in June, which will support features such as multitasking, large data sets, artificial intelligence, and large language models.

Regarding concerns raised by Trump's tariff policy, Krishnamoorthy pointed out:

"In the short term, uncertainty may cause customers to adopt a wait-and-see attitude. However, as of the second quarter to date, there has been no substantial change in customer purchasing behavior."

Cavanaugh stated in a media interview that no company can be completely unaffected by the Trump administration's import tariffs on goods. He mentioned in a conference call that IBM's spending on imported goods accounts for less than 5%.

Additionally, the federal government spending cuts led by the "Department of Government Efficiency" under Musk have begun to impact IBM. Cavanaugh noted that approximately 15 contracts between IBM and the federal government have been canceled or suspended, which is expected to reduce future payments by about $100 million. He added that federal business revenue accounts for less than 5% of IBM's total revenue.

He pointed out:

"If the macroeconomic environment worsens, some of our businesses may experience greater volatility. This includes consulting services and on-demand billing services that are significantly affected by discretionary spending and DOGE-related projects, as well as certain software and distributed infrastructure businesses, including Red Hat."