IBM’s acquisition of Red Hat continues to pay operational dividends for Big Blue, though it might not be enough to stave off a dramatic drop in overall business tied to the COVID-19 pandemic. That drop has led IBM to follow a number of other vendors in suspending its operational guidance for the rest of the year.

IBM’s overall financial picture for the first quarter of 2020 started off as expected, with Red Hat again driving most of IBM’s growth. However, as IBM CEO Arvind Krishna told financial analysts, “in the last few weeks we faced a shift in client priorities toward the preservation of capital.”

Krishna said this shift impacted IBM’s software business “disproportionately” and that other parts of IBM’s business “maintained modest momentum.”

IBM CFO Jim Kavanaugh provided more color on the situation, explaining that the company was “tracking roughly in line with our expectations” through February. “As we got into March, the health situation and resulting social distancing became more widespread,” he added. “As you would expect, we saw a noticeable change in client priorities. With that, there was effectively a pause as clients understandably dealt with their most pressing needs.”

Kavanaugh noted that IBM’s software business took a significant hit as those deals have traditionally closed during the final two weeks of the quarter.

“For those clients that did engage at the end of the quarter, there was a noticeable change in priorities where focus very quickly shifted to the stability of their operations and preservation of cash,” Kavanaugh said. “They moved ahead with spending that addressed immediate and essential needs, including running mission-critical processes and securing a remote workforce.”

"February did not indicate where March would wind up. March didn't indicate where Q2 will wind up," Ted Schadler, VP and principal analyst at Forrester Research, wrote in an email to SDxCentral. "This thing is developing much too quickly to have certainty about."

Luckily, IBM’s software business is grouped in with its Red Hat-powered cloud operations. That broader group posted a 5% year-over-year increase in revenues during the quarter. Most of that was on the back of its Red Hat-powered cloud and data platforms business, which posted a 32% increase.

Specific to Red Hat, revenues surged 20% and Red Hat’s OpenShift and Ansible platforms helped to boost IBM’s emerging technologies revenues nearly 40% in the quarter. Highlighting Red Hat’s heat, Kavanaugh said that the division signed its two largest deals in history during the quarter, and now counted more than 2,200 customers using Red Hat services.

BMO Capital Markets analyst Keith Bachman noted in a research note that without Red Hat, IBM’s revenues actually contracted nearly 4% year over year.

The only other IBM division to post a year-over-year revenue increase was its “systems” business, which is based on its mainframe hardware and operating system software. That division posted a modest 3% revenue increase based on its Z mainframe and storage systems.

Kavanaugh did note that IBM’s cloud business had generated $22 billion in revenues over the past year, which put it third behind Amazon Web Services (AWS) and Microsoft. Synergy Research Group recently had IBM ranked as No. 4 in terms of worldwide market revenue share of the cloud market for the fourth quarter of last year.

Overall, IBM’s revenues were down just over 3% for the quarter compared to the first quarter of 2019. A surge in interest expenses during the latest quarter further handcuffed profits, which dropped from $1.6 billion last year to $1.2 billion this year.

“We believe that IBM’s organic growth will remain challenged for the next few [quarters], though IBM is not alone in facing tough macro conditions,” Bachman wrote.

As for it pulling its future guidance, Schadler noted that "indicates uncertainty about Q2 and beyond. We'll see other service providers and software companies doing the same in the Q1 earnings calls, I expect."