Cloud Costs Could Eat Into IBM Q1 Profit

Technology pioneer IBM Corp. (IBM) likely had higher cloud platform development costs and adverse currency conversions cut into profit in the first quarter.

IBM's net income probably fell almost 10% to $1.2 billion, or $1.26 per share, in the first quarter, according to analyst estimates compiled by Visible Alpha. Revenue is expected to be $14.4 billion, a 1% increase from the prior-year quarter. The company's high-margin software segment—by far its most profitable business unit—is expected to report its slowest rate of revenue and profit growth in over two years. IBM will report first-quarter earnings after markets close Wednesday.

IBM has positioned itself as a leader in the fast-growing cloud computing industry, but competition and inflation are raising the costs of infrastructure management and development. Industry-wide, cloud providers are passing along some of those costs to customers through price increases. Still, escalating expenses could narrow IBM's margin in this area.

Investors should expect to see a special charge—estimated to be around $300 million—related to IBM's spinoff of Kyndryl, its managed infrastructure operation, and its divestiture of the Watson healthcare branch last year. Special charges related to laying off almost 4,000 employees could also weigh on the company's bottom line.

IBM shares are down about 8% so far this year, while the benchmark S&P 500 Information Technology Sector Index is up 20%.

_{Source: Visible Alpha}