UPDATED 18:25 EST / JANUARY 21 2020

IBM logo and sign INFRA

IBM surprises with revenue growth and offers bullish 2020 outlook

IBM Corp. defied critics and a handful of Wall Street analysts who have recently gone negative on its stock by reporting earnings per share two cents better than consensus estimates and breaking a five-quarter string of declining revenues with a 3% currency-adjusted rise in sales.

Fourth-quarter earnings of $4.71 per share beat analysts’ expectations of of $4.69, while revenue of $21.78 billion squeaked past estimates of $21.62. The results were the first signs that Big Blue is beginning to see the bottom-line benefits of its acquisition of Red Hat Inc., which was consummated last July.

Red Hat revenue rose 24%, eclipsing $1 billion in the quarter for the first time. Red Hat-related contracts accelerated from the third to the fourth quarter and 21 new Red Hat-related deals of more than $10 million each were closed in the quarter, the company said. “We continued to take share with [Red Hat Enterprise Linux] as clients put more of their enterprise workloads on Linux,” said Chief Financial Officer James Kavanaugh.

Red Hat also contributed to currency-adjusted revenue growth of 23% in IBM’s cloud business, up from 14% growth the previous quarter. “This is one area where we’re seeing the synergies with Red Hat come together,” Kavanaugh said, citing strong acceptance of the integrated Cloud Pak suites of task-specific containerized software that were introduced last fall and that run on top of a Red Hat OpenShift base.

With full-year revenues of $21.2 billion, IBM Cloud now accounts for some 30% of the IBM’s revenues, noted Charles King, principal analyst at Pund-IT Inc. “That’s more than a seven-fold increase from the 4% of IBM revenues cloud represented when Ginni Rometty become CEO,” he said. “Their cloud strategy appears to be working fine.”

IBM stock roared ahead more than 5.5% in early after-hours trading. Shares are up nearly 10% from the low reached after the company missed estimates in its previous quarter.

The Red Hat effect

“I believe Red Hat synergies are starting to kick in based on the sharp revenue gains,” said analyst Patrick Moorhead of Moor Insights & Strategy. “It’s likely we have seen the trough and I believe the next one or two quarters could show revenue growth.”

IBM apparently agrees. It raised full-year earnings guidance for 2020 to $13.35, above analyst expectations of $13.29. Kavanaugh said revenues are expected to grow for at least the next “couple of quarters.”

The earnings surprise is all the more notable given that enterprise suppliers like Cisco Systems Inc., Dell Technologies Inc., Hewlett Packard Enterprise Inc. and NetApp Inc. have recently reported weakening demand. IBM was able to buck the trend in part thanks to the rollout of its new line of Z 15 mainframes, “which drives growth from pent-up demand,” Moorhead said.

IBM recent shed a half billion dollars in undervalued software assets, so “that drag on earnings will disappear,” King said. “All in all, I believe IBM’s optimism is warranted.”

IBM’s systems segment, which includes the new big iron, grew 16% year-over-year on greater than 60% growth in mainframe sales. Storage revenues grew 3% and sales of the company’s line of Power processors declined an unspecified amount.

Services, which make up more than half of Big Blue’s revenues, declined slightly. The Global Business Services segment, which encompasses application development and cloud migration, was flat, while revenue declined 4% in Global Technology Services. However, Kavanaugh blamed the slide in part on a tightening focus of IBM’s services business. He said the company nearly doubled the number of new cloud migration contracts across both units and has a backlog of more than an $8.5 billion in unrecognized services revenue.

“We are going to take aggressive actions across our GTS business model,” focused on hybrid cloud, cybersecurity, multicloud management and OpenShift, he said.

Photo: Victorgrigas/Wikimedia Commons

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