IBM improves gross margins in Q2 under new CEO

Key Points
  • IBM's adjusted earnings fell 31% and beat analysts' expectations.  
  • The company's revenue declined year over year for the second quarter in a row, with coronavirus playing a role across multiple business lines.
SVP and Director at IBM Research Arvind Krishna speaks on stage during the 2016 Wired Business Conference in New York on June 16, 2016.
Brian Ach | Getty Images

IBM shares rose as much as 6% in extended trading on Monday after the company reported second-quarter earnings that were better than analysts had expected.

Here's how the company did:

  • Earnings: $2.18 per share, adjusted, vs. $2.07 per share as expected by analysts, according to Refinitiv.
  • Revenue: $18.12 billion, vs. $17.72 billion as expected by analysts, according to Refinitiv.

Adjusted earnings per share were down 31% on an annualized basis in the quarter, and revenue declined 5%, according to a statement. It's the company's second consecutive quarter of revenue decline as the coronavirus hit the company's results.

The company's net income, which came out to $1.36 billion, was down 46%. However, the company improved gross margins in three of its five units. IBM's total gross profit margin was 48%, up from 45.1% in the first quarter and up from 47% in the year-ago quarter.

"It's likely that we see that the economic recovery is looking to be longer and more protracted than we might have hoped for back in March," Arvind Krishna, who replaced Ginni Rometty as CEO on April 6, told analysts on a conference call with analysts on Monday.

IBM did not update its full-year guidance. In April IBM withdrew its guidance for the full year because of the pandemic.

IBM beats EPS and revenue in Q2
IBM beats EPS and revenue in Q2

In the quarter IBM saw weakness from smaller customers, said Jim Kavanaugh, IBM's chief financial officer.

"While we have adapted quickly to conduct business virtually around the world, as expected, we did have disruptions in transactional performance and volume reductions," Kavanaugh said. "Many clients continued to delay projects, defer purchases, and favor opex [operating expenditures] over capex [capital expenditures' spending in this environment. This pause in large purchases and discretionary spending was most evident in our perpetual software licenses and project-oriented services."

Revenue from IBM's Global Technology Services category totaled $6.32 billion, down almost 8% year over year and above the FactSet consensus of $6.24 billion. Slower business from retailers, automakers, consumer goods companies and transportation customers because of Covid-19 hurt the segment.

IBM's Cloud and Cognitive Software segment, which includes Red Hat, produced $5.75 billion in revenue. That's up 3% and barely above than the $5.74 billion FactSet consensus. Red Hat revenue was $1.09 billion on a normalized basis, up 17%. Red Hat's growth rate was down from 18% in the first quarter.

The Global Business Services unit had $3.89 billion in revenue, which was down 7% and slightly higher than the $3.87 billion consensus.

"As the pandemic intensified and the macroeconomic climate worsened, clients quickly shifted their focus to operational stability and cash preservation," Kavanaugh said. "This resulted in a delay in both the existing projects and new commitments especially in projects that are more discretionary or with longer time to value."

In the quarter IBM announced cloud business from Movius and Prysmian Group, and it told the News & Observer newspaper in North Carolina that it was cutting a number of employees. And Arvind Krishna started his job as IBM's CEO on April 6. 

Before the after-hours move, IBM stock had fallen 5% so far this year.