IBM Corp. just can’t get its revenue momentum going.

The computer giant today said its third-quarter revenue fell, dragged down by weaknesses in its systems, services and financing units. Quarterly revenue fell 3.1% from a year ago, to $17.6 billion, when adjusted for divestures and currency fluctuations. That’s the 29^th revenue decline in the past 33 quarters.

Net income fell to $2.58 per share from $2.68 per share a year ago. Earnings from continuing operations also declined slightly.

The results were in line with analysts’ expectations and estimates IBM issued earlier this month when it announced the planned spinoff of its infrastructure services business. In after-hours trading, Big Blue stock fell one-third of a percentage point.

Chief Executive Arvind Krishna (pictured) said growth is in the cards once the divestiture is complete. “We expect to deliver sustainable single-digital revenue growth upon the separation of Newco” he said on a call with analysts, referring to the still-unnamed entity.

The spinoff is part of an ongoing IBM effort to divest itself of low-margin, low-growth businesses to focus on growth areas such as hybrid cloud and analytics. However, executives made it clear that they expect big things out of Newco in the long term.

The $2.2 billion charge that IBM expects to take in the fourth quarter to fund the acquisition will give the spin-off “an investment-grade balance sheet,” Krishna said, as well as making it “more resilient and able to invest in automation. That will enable them to make investments that IBM might not because of dilution,” he added.

Focus on hybrid

A leaner IBM expects to double down its focus on hybrid cloud, which Krishna termed “a tremendous opportunity valued at $1 trillion and enabled by the Red Hat Open Hybrid Cloud Platform and services business that meets clients where they are.”

Hybrid cloud is one area where IBM can significantly differentiate itself, said Ted Schadler, an analyst at Forrester Research Inc. “They’re hardly going to be the only player in town but they’re going to be the only hybrid player at scale,” he said. Comparing the revenues and growth rates of public cloud vendors to IBM’s is essentially apples and oranges because public infrastructure is a commodity, Schadler said.

“The journey to cloud lays the foundation for a lot of other things they’ve been investing in,” such as artificial intelligence and process improvement, he said. “If you’re JP Morgan, you’re not going to run everything in Azure; you’re going to tie your applications to a multicloud environment,” he said, “so they’re going after that.”

Total cloud revenue increased 19%, to $6 billion, and came to $24.4 billion for the last 12 months, up 25% on an adjusted basis.

Executives declined to provide guidance for the fourth quarter and warned against over-optimism, given the uncertainty of the pandemic and a strong comparison to 2019. “We’ll be wrapping on a very strong fourth quarter last year with the first full quarter of z15 availability and the first Red Hat contribution,” Kavanaugh said, referring to IBM’s z-series mainframes.

‘Schizophrenic’ sales environment

Krishna said forecasting is difficult in a sales environment he described as “schizophrenic. While we are seeing very healthy growth in some parts of our business it’s been a pause for some customers,” he said, estimating that about 30% of customers have clamped down on spending. “We also tend to be with larger clients, so we don’t think they have sustainability issues.”

Chief Financial Officer James Kavanaugh said IBM has a $108 billion backlog in business and “healthy pipelines” in Red Hat, cloud transformation, cloud/data platforms and cognitive applications.

“I was most impressed with the increased double-digit revenue growth from Red Hat and cloud,” said Patrick Moorhead, president at Moor Insights & Strategy. “This is exactly where you would want growth coming from.”

The Cloud & Cognitive Software category, which includes Red Hat Inc., cognitive applications and transaction processing platforms, saw revenues climb an adjusted 6%, to $5.6 billion, ahead of estimates of $5.48 billion. Cloud & Data Platforms, grew an adjusted 19%, led by Red Hat. The total value of deals involving Red Hat doubled over last 12 months leveraging IBM’s “account incumbency,” Kavanaugh said.

Services slide

Global Technology Services’ revenue of $6.5 billion were down an adjusted 4% from last year but above the $6.25 billion analyst consensus. Global Business Services revenue was $4 billion, down from $4.12 billion a year ago but ahead of estimates of $3.9 billion.

“Since March our GBS revenue has reflected the changing environment, leading to project delays,” Kavanaugh said. However, he said signings increased in the third quarter, presaging unit growth. “We are investing in our GBS business to grow for the future.”

With gross profit margins of 35% of less, the services units would appear to be at odds with IBM’s stated commitment to high-margin businesses, but Schadler said the linkage is necessary. “They need to get clients to invest in hybrid cloud. To do that they need services like application migration, application building and platform services,” he said. “GBS is kind of their engine to get applications moved to the hybrid cloud.”

The units delivered more than 90% of their services remotely in the quarter, which expanded gross margins and set the stage for what Kavanaugh said would underscore a new delivery model the company is developing.

Systems revenue was especially weak, coming in at $1.3 billion, down an adjusted 16% from a year ago and well below analysts’ expectations of $1.55 billion. IBM blamed the declines on a 20% drop mainframe revenues and storage systems, both of which it said are part of the normal product cycle. Although customers’ cash conservation is affecting mainframe sales, Krishna said, “as we invest more in cloud and Red Hat I expect we’ll see that more than offset anything that happens” in transaction processing platforms.

Analyst Moorhead acknowledged that systems revenue was “a big decline, but I’m not concerned yet, as its infrastructure is very cyclical.”

Photo: Robert Hof/SiliconANGLE