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IBM 'seems to be showing it's in a position to weather' the tough economic climate: Analyst

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Futurm Principal Research Analyst Daniel Newman joins Yahoo Finance Live to discuss IBM's latest earnings results and what it shows about the company amid market volatility.

Video Transcript


SEANA SMITH: IBM shares moving lower, despite posting a 9% jump in sales. You can see the stock off just about 3% right now. Revenue for the quarter coming in at $15.5 billion. The estimate on the Street was for $15.1 billion. For more on this, we want to bring in Daniel Newman, principal analyst at Futurum Research. Daniel, it's great to see you. We certainly are seeing some concern here, at least in the aftermarket action, on the heels of these results from IBM. It looks like the strengthening dollar affecting their full year outlook. What was your big takeaway from the results that we just got?

DANIEL NEWMAN: Yeah, I'm just digesting the results, but overall, it's hard to not feel a little bit more positive, given the general negative sentiment towards growth. Last week, ServiceNow CEO Bill McDermott came out, kind of warned about the impact of 4x in the currency exchange. Markets sold hard in response to that. But overall, with the general macro conditions, I still think IBM's a bellwether, and it's showing overall strength for enterprise technology.

I've been looking at AI, Automation, Hybrid cloud, and kind of wondering if these would have a stronger lasting power in the recessionary environment. And what IBM is showing is, yes. I mean, this is a company that wasn't growing much when things were going up. And now over the last few quarters, Arvind Krishna, after the transition, the spin-off of Kyndryl, is showing that this company is getting close to double digit. And if you add constant currency, it actually is in the double digit range. So I see the market's negative, but I think this was a really good print for IBM.

RACHELLE AKUFFO: And we do know that it has been a volatile year, year to date for IBM's stock. And a lot of people are wondering, what we're really going to see some of the real fallout come when we look at the third quarter. What are your expectations, given where we are now and given these current earnings that have just come out?

DANIEL NEWMAN: Well, there's a couple of things to consider. I think the company has some parts of its business that are very cyclical, like its infrastructure business, the Z business, which is their mainframe, but it's a huge profit and revenue. And they only had one month of that business in this quarter. You saw that infrastructure number up double digits significantly this quarter. So that whole sales cycle is going to really pump into the next quarter. So I feel that's going to help.

And then if you look at the growth, like, in the cloud area, like Red Hat, I mean, you saw 12% steady double digit, but this overall result wasn't based upon any part of the business doing extraordinarily well while others were really suffering. What I see here is the post-Kyndryl environment. The company seems to be getting its product mix right. It's focused on hybrid Enterprise Cloud, partnering with the likes of AWS, as opposed to so much trying to compete with AWS. It seems to be working.

And if you're an investor and you're kind of looking at that value play, value yield, and a company that's going to be able to persevere through a tougher climate, IBM has kind of shown that, even going back as far as November, compared to a lot of the other higher growth companies. So you might be right. There might still be some tougher quarters ahead. But IBM seems to be showing it's in a good position to weather.

DAVE BRIGGS: Boy, you're right about that infrastructure number up almost 19%. Consulting up nearly 10%. It looks like across the board. Is there any weak spot at IBM? And what's your rating?

DANIEL NEWMAN: Well, as an industry and tech side, I don't rate. But what I would say, as an analyst looking at the overall business health, I think the company has actually done a really good job of diverging from those pressure areas. I think the spin-off of Kyndryl was really getting rid of something that had made growth nearly impossible, allowed Kyndryl to focus on that part of the business.

And now you see Arvind in-- as leadership, really focusing on that sort of, let's get high single and low double digit across the portfolio. I'd like to see cloud grow fast. Sorry, I'd like to see cloud grow faster to keep up with those 20s and 30s that we see from some of the hyperscalers. But I also think that's a little different for IBM. Very focused on the enterprise, very focused on consistent growth across the portfolio.

And like I said, if we're going to weather this difficult economic time, I think that slow, steady, and being of high value, helping companies automate, deploy artificial intelligence, utilize their data, and move workloads to the cloud are going to be the key elements of the more successful part of tech over the next 12 to 18 months.

SEANA SMITH: Hey, Dan, in the release, they said that they did see balanced growth across our geographies. IBM saying that in their earnings report. If we do, though, see a wider than expected slowdown-- I know you're seeing IBM is positioned relatively well. But what impact would that potentially look like on a company like IBM, and more broadly speaking, for the tech sector?

DANIEL NEWMAN: Yeah, the whole world is still playing catch-up. I think the US has been more aggressive in fiscal policy. I think that more aggressive approach has helped to start to see some of the slowdown in demand that's going to be required for us to get to the other side of this. We, of course, are seeing different policy in Europe. Of course, Asia, they're still dealing with everything from their policy to COVID shutdowns that are still slowing manufacturing.

And so, a company that's as globally distributed as IBM has risks across the world. And of course, we're seeing that with forex right now and in the raise in terms of impact that they noted in this particular print. Having said that, the-- I actually had a chance to talk to Arvind Krishna. I believe it was last quarter. And he actually said the most protected line item in any enterprise's budget is going to be IT.

And that really resonated with me that right now, companies that are going to see their way through this challenging economic environment are going to have to, quote unquote, "tech" their way out of it. They're going to have to make investments in things like automation and AI to make workforces more efficient, to slow down CapEx spending, and of course, to rightsize workforces, which is going to be something that is likely going to have to happen, if we're going to work our way through a recessionary period.

DAVE BRIGGS: Quite the report. Futurum Research principal analyst Dan Newman, appreciate that, sir. Thank you.