Cloud Costs Could Eat Into IBM Q1 Profit

Net income is projected to fall year-over-year as revenue growth lags expenses

IBM logo.

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

Key Takeaways

  • IBM will likely post Q1 EPS of $1.26 vs. $1.40 in the prior-year quarter.
  • Revenue may increase to $14.4 billion from $14.2 billion a year ago.
  • Increased costs of cloud platform development and infrastructure could narrow IBM's margin and impact profit.
  • The company has forecast a $300 million charge related to the sales of its Kyndryl and Watson businesses.

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%.

Chart comparing the total return of IBM stock, the S&P 500, and the S&P 500 Information Technology Sector Index between Dec. 31, 2022 and April 17, 2023.
IBM Key Stats
  Estimate for Q1 FY 2023 Actual for Q1 FY 2022 Actual for Q1 FY 2021
Earnings Per Share ($) 1.26 1.40 1.12
Revenue ($B) 14.4 14.2 13.2

Source: Visible Alpha

Article Sources
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  2. Visible Alpha. "Financial Data."

  3. IBM Corp. "IBM Cloud Wins Best Cloud Infrastructure at the 2022–23 Cloud Awards."

  4. PR Newswire. "Virtana Research: 94% of IT Leaders Report Cloud Storage Costs Are Rising; 54% Confirm Storage Spend is Growing Faster Compared to Overall Cloud Costs."

  5. CNBC. "IBM tops revenue estimates, says it will cut 3,900 jobs."

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