IBM’s faith in cloud underscored by Q3 performance

20 Oct 2020244 Views

Image: © danielskyphoto/Stock.adobe.com

IBM’s third-quarter earnings matched with expectations and aligned with the company’s cloud-focused strategy.

IBM’s latest earnings report showed a decline in revenue but overall business has been buoyed by strong performance in cloud.

Total revenue fell 2.6pc in Q3 2020 to $17.6bn, slightly above analysts’ forecasts, while revenue from the cloud and cognitive software unit was up 7pc to $5.6bn.

Total cloud revenue for IBM in the third quarter of this year amounted to $6bn, a 19pc increase. Over the last 12 months, total cloud revenue has reached $24.4bn, up 22pc.

Red Hat, IBM’s biggest ever acquisition, saw its revenues rise 17pc. Now part of IBM’s hybrid cloud division, Red Hat is key to the company’s focus on what it has described as a trillion-dollar market opportunity. The company announced earlier this month that it would accelerate its hybrid cloud growth strategy by spinning off its IT infrastructure side of the business.

“The strong performance of our cloud business, led by Red Hat, underscores the growing client adoption of our open hybrid cloud platform,” said IBM CEO Arvind Krishna.

“Separating the managed infrastructure services business creates a market-leading standalone company and further sharpens our focus on IBM’s open hybrid cloud platform and AI capabilities. This will accelerate our growth strategy and better position IBM to seize the $1trn hybrid cloud opportunity.”

Units in decline

Aside from the cloud and cognitive unit, IBM’s other business units reported declining revenue. Global business services revenue hit $4bn, down 5pc, while global technology services revenue dropped 4pc to $6.5bn. However, in both segments, cloud revenue was up.

Support Silicon Republic

The systems unit, which includes hardware and operating systems software, reported revenues of $1.3bn, a drop of 15pc. This was driven by declines in the IBM Z line and storage systems, which the company said reflected the impact of product cycle dynamics.

In global financing, which covers used equipment sales, IBM saw its steepest decline in revenue of 20pc to $273m. This, the company said, was due to the wind-down of OEM commercial financing.

Cloud-first focus

As part of its strategy to focus on hybrid cloud growth, IBM announced earlier this month that its managed infrastructure services unit would become a new public company, provisionally called NewCo, by the end of 2021.

“Client buying needs for application and infrastructure services are diverging, while adoption of our hybrid cloud platform is accelerating,” Krishna said at the time of the announcement.

“Now is the right time to create two market-leading companies focused on what they do best. IBM will focus on its open hybrid cloud platform and AI capabilities. NewCo will have greater agility to design, run and modernise the infrastructure of the world’s most important organisations. Both companies will be on an improved growth trajectory with greater ability to partner and capture new opportunities – creating value for clients and shareholders.”

IBM had already accelerated its hybrid cloud strategy with the Red Hat acquisition and it is now seeing revenue growth driven by cloud software and solutions.

“In the third quarter we continued to deliver strong gross profit margin expansion, generated solid free cash flow and maintained a sound capital structure with ample liquidity,” said CFO James Kavanaugh of the Q3 earnings. “We have the necessary financial flexibility to increase our investments in hybrid cloud and AI technology innovation and skills, while remaining committed to our longstanding dividend policy.”

Elaine Burke is the editor of Siliconrepublic.com

editorial@siliconrepublic.com