IBM, the renowned tech and consulting giant, has felt the effects of recent cuts from the Department of Government Efficiency (DOGE). During its Q1 earnings call, executives downplayed the potential long-term impact of these cuts on the company’s overall business strategy.
The DOGE cuts amount to $100 million toward future payments. As a result, IBM today has a backlog of less than $100 million all funded over several years. Despite this setback, the company maintains a robust consulting practice that generates revenue from federal contracts, accounting for between 5% and just under 10% of total revenue. In just Q1, IBM had reported last quarter’s record-setting management consulting revenue in excess of $5 billion dollars.
Chief Financial Officer of IBM, James Kavanaugh, made no bones about it on the earnings call. He noted, “We’ve had a handful of contracts, either statement of work, or cancel and on our annualized backlog of over $30 billion in total consulting.” This indicates that while the company faces challenges, it retains a substantial portfolio of contracts to support its consulting revenue.
As IBM’s new chief Arvind Krishna likes to say, most of the work IBM does in mission-critical. He stated, “The vast majority is critical work — we actually process veterans benefit claims.” As such, it raises the stakes regarding IBM’s core services, especially in the context of government contracts that affect millions of veterans.
Both Krishna and Kavanaugh sounded very bullish on IBM’s prospects to continue working their way through this economic cycle. Krishna indicated a cautious approach regarding consulting for the year, saying, “We’re prudently cautious around consulting for the year.” This is a great balance between the realization of challenges that lie ahead and recognition of the company’s strengths.
Krishna pointed to the company’s varied business model as a strength. Having this kind of diversity allows the business to pivot easily in today’s climate and drill down narrowly in various markets. That diversification can protect against downturns potentially caused by DOGE cuts.
Looking ahead as IBM continues through the remainder of 2023, Kavanaugh and Krishna both expressed optimism about the company’s future. They remain focused on leveraging their extensive backlog and critical services to maintain stability and growth despite external pressures.
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