Even Big Blue can’t escape the chainsaw.
International Business Machines (IBM) began its journey early in the 20th century and kept growing through the era of electric typewriters and computers right up to the age of the cloud and artificial intelligence.
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The tech giant now finds itself in the world of Doge, the Department of Government Efficiency, and its chainsaw-wielding commander — and Tesla’s (TSLA) CEO — Elon Musk.
Since February Doge’s cuts have led to more than 280,000 layoffs of federal workers and contractors in a wide range of positions across 27 agencies.
One of the hardest hit was USAid, the nation’s largest foreign-aid agency, which Doge shuttered.
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IBM, which reported first-quarter results on April 23, saw Doge cancel 15 government contracts, which represented around $100 million in future payments.
One of those contracts, valued at $95 million, charged IBM with deploying its cybersecurity staff to allies with USAID presence — including Albania, Moldova, Azerbaijan, Kosovo and others — to help build out security operations centers, train security practitioners and enhance critical infrastructure defenses.
Arvind Krishna, IBM’s chairman and CEO, said the company lost business due to Doge cuts.
IBM CEO warns of uncertainty
“We had a couple of contracts that were impacted in the first quarter,” Arvind Krishna, IBM’s chairman, president and CEO, said during the company’s earnings call.
“You would expect USAid, where we did some work, was impacted, but not really in most other cases,” he added. “The work we tend to do is much more mission-critical, is much more about building the government systems, which make them more efficient. And so we see them carry on.”
Krishna told analysts that it was “hard to predict where that goes over the rest of the year, so I’m not going to try and make that prediction on Doge and consulting except to caution, if there is pressure in the economy, consulting tends to see headwinds before other parts of the business.”
“In the near term, uncertainty may cause clients to pause and take a wait-and-see approach,” he said. “Consulting is also more susceptible to discretionary pullbacks and Doge-related initiatives.”
IBM beat Wall Street’s earnings and revenue forecasts, but the company’s software and cloud businesses fell short of expectations.
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TheStreet Pro’s Stephen Guilfoyle looked over IBM’s financials and shared his thoughts about Big Blue’s investment potential.
“Growth is not really what one invests in IBM for,” Guilfoyle said in his TheStreet Pro column. “Free cash flow is. That and the dividend of $6.68 per year, which works out to a yield of about 2.75%.
“I’m not all that impressed overall. I would like to see some of that cash flow put toward the reduction of what could be a burdensome debt load if not focused on soon.”
Guilfoyle, whose career dates back to the floor of the New York Stock Exchange in the 1980s, said IBM’s total assets amount to $145.67 billion.
“But goodwill and other intangibles make up $78.457 billion of that,” he said. “At 53.9% of total assets, that’s awfully high and somewhat discomforting.”
Total liabilities less equity comes to $118.71 billion, including long-term debt of $56.37 billion.
Analyst cites macroeconomic pressure
“That is a lot, and combined with the short-term debt, [it] dwarfs the cash position,” the veteran trader said. “IBM can meet its obligations. On that, there is no doubt. Understand, though, that growing the debt load is not an endless resource and this number will have to be watched.”
Several investment firms issued research reports assessing IBM’s latest results.
BMO Capital lowered its price target on IBM to $260 from $280 and affirmed a market perform rating on the shares after the Q1 results, according to The Fly.
Software growth missed expectations in the quarter, the investment firm said. BMO added that it had expected relatively weak consulting results and guidance given results from other leading service providers.
Oppenheimer pared its price target on IBM to $290 from $320, while keeping an outperform rating on the shares, citing compressed market multiples.
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The investment firm said revenue and profit were slightly ahead of expectations, benefiting from decent software growth and foreign exchange. But consulting revenue was flat and started to reflect macroeconomic pressure, and infrastructure declined 4%, due primarily to the end of the Z16 mainframe system product cycle.
Morgan Stanley reduced its price target on IBM to $233 from $237 while maintaining an equal weight rating.
Software missed expectations this quarter after several quarters of outperformance, the investment firm said. While one quarterly miss “doesn’t make a trend,” execution “has to be flawless” to maintain IBM’s premium valuation, Morgan Stanley said.
The firm said that coming into Q1, expectations were for software “to outperform and more than offset relative weakness in consulting and infrastructure [mainframes] —both of which are more macro sensitive — helping to support IBM’s premium valuation and status as a relative safe haven in a volatile market.”
MS added that it would expect upside in free cash flow this year if the U.S. dollar remains weak.
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