IBM revenue grows for second straight quarter, cheering investors

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IBM Corp. provided the best evidence yet today that it’s back on a growth track, reporting that second-quarter revenue rose 3% from a year ago.

Revenue of $18.75 billion was actually flat when adjusted for currency fluctuations and divested businesses, but it was still well ahead of analysts’ estimates of $18.29 billion.

Adjusted earnings rose 7% from a year ago, to $2.33 a share, slightly better than analysts’ estimates of $2.31 a share. It was IBM’s second straight quarter of revenue growth, something that has been in short supply for the computing giant lately. Prior to the first quarter, IBM had reported declining revenue for four quarters in a row and 30 of the past 34 quarters.

Revenue for the company’s cloud and cognitive software unit, which includes Red Hat Inc., grew 6%, to $6.1 billion, well ahead of analysts’ estimates of $5.93 billion. The unit is likely to draw considerable scrutiny in coming quarters following the unexpected announcement of the departure of IBM President and former Red Hat Chief Executive Jim Whitehurst earlier this month. IBM said Red Hat revenue rose 17% on an adjusted basis.

Hybrid cloud payoff

CEO Arvind Krishna (pictured) said the company’s focus on leading in hybrid cloud, a strategy undergirded by Red Hat, is paying off. “Hybrid cloud is more than a strategy; it is the reality for our clients,” he said. More than 2,300 customers are using IBM’s hybrid cloud platform, four times the number at the time of the Red Hat acquisition, Krishna said. He also touted the success of Cloud Paks, which are packages of intelligent software that address various specialty areas.

“Cloud Paks have really done well for them,” particularly in helping customers with complex cloud migration and modernization challenges, said Bola Rotibi, research director for software development at CCS Insight Ltd.

“IBM was well ahead of the curve and its cloud competitors in recognizing that enterprises were not interested in adopting single public cloud platforms,” said Charles King, chief analyst at Pund-IT Inc. “By focusing instead on supporting hybrid multicloud deployments and delivering modernization with open source tools, IBM has positioned itself as a trustworthy leader in hybrid cloud.”

IBM executives reaffirmed their guidance toward mid-single-digit growth through the rest of the year. Their reassurances appeared to be aimed at calming investors who were dealt some disappointing surprises over the past couple of years. “To be honest, a lot of the things I heard from them today I heard in Q1,” Rotibi said. “It’s not a lot new.”

IBM shares traded nearly 3% higher in after-hours trading. The company’s stock has failed to gain much traction amid a 15% rise in the Standard & Poors 500 index this year. Shares are trading lower than they did at the time it announced the Red Hat acquisition in October 2018.

The closely watched cloud revenue business grew an adjusted 13% from a year ago, to $7 billion. Revenue for the Cloud & Cognitive Software unit jumped 25% on an adjusted basis and the Global Business Services Cloud grew 30%. Krisha said the unit will show “mid-single-digit growth going forward” as growing contributions from the Red Hat and security businesses offset ongoing declines in transaction processing software.

Betting on services

Global Business Services revenue grew better than 10%, to $4.3 billion. IBM booked $9.2 billion in new services signings in the quarter, said Chief Financial Officer James Kavanaugh. “We see very strong momentum in our GBS base of business,” he said. “We had strong performance in signings in the quarter, our trailing 12-month book-to-bill was 1.2 and we had roughly double-digit growth in signings across all subsegments.”

IBM is betting big on its services business not only to help enterprise customers that are struggling with the complexity of managing multiple clouds but to help them integrate applications across platforms, Rotibi said. “It’s where IBM has been strong historically,” she said. “They’ve invested in GBS to get immediate growth because clients need hand-holding.”

Systems revenue of $1.7 billion fell short of $1.85 billion a year ago but matched analysts’ expectations. IBM’s mainframe product line is due for a refresh next year and should boost systems revenues.

Growing customer demand for subscription pricing is depressing IBM’s software license revenue across the board, Kavanaugh said, but that also helped drive software deferred income to more than $1 billion.

IBM is investing aggressively in “skills, practice delivery and market resources,” growing its workforce more than 10% in those areas, Kavanaugh added. As a result, labor expenses will remain higher than usual during the next quarter.

Revenue at Global Technology Services, which will be spun off into an independent company called Kyndryl by the end of the year, was flat at $6.3 billion. Kavanaugh said spinoff plans are proceeding apace. “We are continuing to build out the management system and support structure and making strong solid progress executing the necessary financial, legal and regulatory milestones to enable the transaction,” he said.

“Shedding low-growth business unit like the managed infrastructure portion of GTS is as much about bolstering profit margins as it is enhancing business growth,” King said. “IBM appears to be on track to reap the benefits they’ve projected the Kyndryl spinoff will deliver.”

Photo: IBM

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