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If International Business Machine Corp.’s early warnings are any indication, this isn’t likely to be a pretty earnings season for software companies.
IBM IBM, +0.24% pointed to a sharp slowdown in software sales during late March as the COVID-19 outbreak worsened in the U.S., suggesting some pain ahead for the enterprise software industry until businesses feel more certain about the economy.
Read more: IBM stock slips as software sales slumped in March due to coronavirus
“We believe that IBM’s comments about cash conservation is perhaps the key takeaway for software investors as while we believe the interest in digital transformation technologies remains high – many projects are going to get put on the back burner until there is more visibility into the economic backdrop,” wrote Evercore ISI analyst Kirk Materne in a Tuesday note to clients.
Though the last two weeks of the quarter are typically big for IBM in terms of closing deals, Chief Financial Officer James Kavanaugh said that the company saw big changes in customer behavior toward the end of the period. Customers that “did engage” with IBM indicated that their focus was “the stability of their operations and preservation of cash,” he said.
In the view of Evercore’s Materne, these dynamics have the potential to hit software-industry results throughout 2020. “We believe that not only is this going to lead to a push out in deals in 1H, but could also result in a slower level of pipeline build that could weigh on growth later in the year,” he wrote.
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Raymond James analyst Michael Turits also expects that IBM’s commentary could be a sign of what’s to come with software peers. IBM withdrew its forecast, a move Turits said some other software companies could take too.
“While IBM appeared positive on cloud and we obviously see cloud as an important part of a longer term shift toward both on premise and work from home agility, based on channel checks we expect to see the downturn including the deferral of large projects slow near term hyperscale cloud growth rates as well,” he wrote.
IBM shares are off 4.8% in premarket trading Tuesday, and they’ve fallen 13.5% over the past three months as the S&P 500 SPX, -1.78% has lost 15% and as the Dow Jones Industrial Average DJIA, -2.44% has declined 19%.
