IBM Corp.’s growth story continued to gain momentum today as the computer giant announced first-quarter results that slightly beat expectations and an upbeat forecast that buoyed the stock price in after-hours trading.
Quarterly revenue rose nearly 11% from a year ago, to $14.2 billion on a constant currency basis, ahead of analysts’ consensus estimates of $13.8 billion. Adjusted earnings of $1.40 per share slightly beat estimates of $1.39.
The best news was strong results in IBM’s growth categories of software, consulting and hybrid cloud. Software revenue rose 15% in constant currency terms, and consulting and hybrid cloud revenues each rose 17%. “IBM is now much more skewed toward growth factors, software and consulting,” said Chief Financial Officer James Kavanaugh.
Although the company has taken some heat over troubles in its Watson Health and artificial intelligence businesses, “that has tended to obscure the larger story around its software portfolio,” said Charles King, chief analyst at Pund-IT Inc. “Despite the challenges of Watson Health, IBM’s software revenues grew at a 15% rate.”
Chief Executive Arvind Krishna’s (pictured) decision to cut IBM’s losses and sell the Watson Health unit signals a pragmatism that is earning respect on Wall Street, said Bola Rotibi, research director for software development at CCS Insight Ltd.
“He was right to do the course correction to focus on practical AI rather than the moonshots of critical big decisions,” she said. “I wouldn’t quite say he’s the darling of the financial markets yet, but there does seem to be some relief in his management.”
Kyndryl spinoff is working
IBM is clearly benefiting from sales to the Kyndryl Holdings Inc. managed services business it spun off last year. Sales to Kyndryl constituted nearly half of the growth in overall revenues and more than half of the growth in software revenues. Kyndryl also helped cushion the 2% decline in infrastructure revenue.
The spinoff, which was completed late last year, has proven to be a sound strategy for IBM to reap some benefits from its services business without dragging down margins, King said.
“The Kyndryl spinoff didn’t imply problems with the managed services business so much as the challenges that occur when shrinking margins impact around a quarter of an enterprise vendor’s business,” he said. “With more than $18 billion in annual revenues and recurring relationships with many of the world’s largest organizations, Kyndryl should be a success on its own. But it simply isn’t the kind of business that IBM needs at this point.”
Krishna’s “big bet on Kyndryl looks to be paying off for both companies, at least at this early stage,” Rotibi said.
IBM shares rose just over 1% in after-hours trading following a 2.3% jump on a generally good day on Wall Street. The stock has mostly tracked the S&P 500 average this year and is trading about 4% lower since the beginning of the year.
In a call with analysts, Krishna said he sees no sign of an end to growth in customers’ spending on technology. “We believe demand for technology will continue to run at four to five points above GDP for the foreseeable future,” he said.
Future looks bright
Investors were cheered by executives’ upbeat comments about the company’s prospects for the year. “We now see revenue growth in 2022 at the high end of our single-digit model,” helped by a 3.5% contribution from incremental sales to Kyndryl, Krishna said, referring to IBM’s earlier forecast that its return to growth would be in the mid-single digits as a percentage of sales. “We continue to see a strong demand environment and we’ve been optimizing our portfolio, expanding our ecosystem and simplifying our portfolio to capture this demand.”
Executives pointed to IBM’s Red Hat subsidiary as a particularly strong performer, saying the unit continues to gain share in enterprise Linux and OpenShift, which is Red Hat’s version of the Kubernetes orchestrator for software containers. Red Hat sales were up 21% at constant currency and the hybrid cloud software segment grew 25%, to $8.8 billion, over the past year. That helped pull consulting revenues in the hybrid cloud segment up 29% year-over-year and 32% on a trailing-12-month basis.
“We saw strong momentum in demand in our Red Hat engagements this quarter, nearly doubling signings year-to-year,” Kavanaugh said.
IBM’s consulting business continues to grow as a percentage of overall sales. Its sales totaled $4.8 billion in the quarter, up 17.4% with business transformation and technology consulting each growing 19%. Krishna said he expects percentage growth in consulting revenue to be in the mid-teens for the rest of the year.
The only negative in the results was infrastructure revenue which fell 0.3%, led by an 18% drop in IBM Z System mainframe sales. However, executives noted that the Z15 high-end mainframe was winding down its product cycle during the quarter and sales of the next generation Z16 have yet to make an impact. “We still shipped more mainframe MIPS [millions of instructions per second] than in any other quarter,” Kavanaugh said.
Analyst King said Z16 sales should help maintain IBM’s momentum in the second quarter. “Since the z16 debuted just a few weeks ago, I believe that cyclical IBM Z Systems sales are likely to give it a healthy boost over the next few quarters,” he said.