IBM Q1 numbers indicate uptick in demand environment

Tapping into the opportunities would require significant investment, thus hurting margins

If IBM's April quarter financial numbers are any indication, there is certainly an uptick in business demand in the technology services space, but profitability is going to be a key issue as companies will have steadily invest in building capabilities in newer technologies which can further erode their profit margins.

In its financial first quarter ending March 31, 2018, the Armonk-headquartered technology giant reported better than expected earnings with its revenues in the quarter at $19.07 billion, growing 5 per cent, topping the analysts’ estimates of $18.83 billion. This was a straight second quarter of revenue growth on year-on-year basis for the company after it reported a revenue growth in the December quarter of 2017 for the first time in more than five years.

The net profit at $1.68 billion, dipped 4 per cent when compared with the same quarter in the previous year while the adjusted gross profit margin fell to 43.7 per cent, a decline of 80 per cent from the year ago quarter. The company, however, said that it was expecting the earning per share (EPS) in 2018 is expected to be at least $13.80 as compared to $13.92 in 2017, indicating that profitability is going to be under pressure going forward, especially in some pockets of its business.

While IBM’s numbers reaffirm the believe demand has bounced back for the sector, at the same time it also throws of challenges that tapping into the demand would require significant amount of reinvesting into the business thus putting the pressure on the margins at least in the short to medium term.

Infosys, India’s second largest IT services company, for example, last week said it was expecting its operating margin to be in the range of 22-24 per cent in FY19 as it was looking at making a significant amount of investment to keep the business in good health in the long run. The company said, among others it is looking at investing in digital technologies organically and inorganically, hiring more number of skilled resources onsite including the US, the largest market for Indian IT so far and training/reskilling of employees.

IBM’s revenue growth is an early indication of technology capital expenditure returning back, said brokerage firm AxisCapital in a report. “Also, consulting delivering stability indicates that discretionary spends showing signs of life. Overall healthy performance gives positive read-thru for Indian IT,” said Shashi Bhusan, Executive Director - IT Services & Telecom, Institutional Equity Research at Axis Capital. “We continue to expect last leg of volatile performance from Indian IT, before returning to steady performance.”

The hallmark of IBM’s Q1 number was it posted fairly strong growth in the key digital segment such as cloud, analytics and AI. The Strategic Imperative Services which largely constitute of the digital products and services and account for almost 47 per cent IBM’s revenue grew 12 per cent in the quarter, led by cloud consulting practice, analytics and mobile. On contrary, the Global Business Services which includes consulting, global process services and application management, grew 4 per cent in the quarter at $4.2 billion.