IBM Corp. beat analysts’ expectations today with fourth-quarter earnings of $2.07 per share, 28 cents better than the $1.79 that was expected, but growth continues to be elusive.

Revenue fell 6.5% from the same quarter last year, to $20.37 billion, about 1.3% below the consensus of $20.63 billion.

The company promised to return to “mid-single-digit” growth in 2021 as uncertainty about the macro economic environment lifts and the company’s renewed emphasis on hybrid cloud and artificial intelligence bears fruit. “We are redefining our future as an AI platform and hybrid cloud company,” said Chief Executive Arvind Krishna (pictured). “This is where we’re focusing our investments.”

Those promises clearly weren’t enough to satisfy investors, who administered a beating to IBM stock, knocking it back nearly 7% in early after-hours trading.

Although IBM said its planned spinoff of its $19 billion managed-infrastructure services business is on track and on scheduled to be completed by the end of the year, some analysts have fretted that the preparation for the massive divestiture is distracting the company from more pressing day-to-day business.

However, executives said the real culprits were an uncertain business climate and a difficult comparison to a strong fourth quarter in 2019. Chief Financial Officer Jim Kavanaugh noted that although revenue fell, earnings per share were lifted by cost-cutting.

He also noted that IBM is making good progress in paying down debt, having reduced the load to $61.4 billion at the end of the year from a peak of $73 billion following the completion of the Red Hat acquisition 18 months ago. Full-year free cash flow of $11 billion puts the company in a good position to make investments, he said, and free cash flow is expected to remain strong for the foreseeable future.

Playing defense

But Kavanaugh and Krishna were put on the defensive during the company’s quarterly earnings call when Sanford C. Bernstein & Co. LLC analyst Toni Sacconaghi noted that IBM’s $2.8 billion revenue growth from the third to the fourth quarter was below its historical average of $3.5 billion. “How do you know something more sinister isn’t going on here?” he asked, suggesting that “you aren’t participating in cloud migration or your software offerings aren’t as competitive as you might think.”

Kavanaugh placed the blame on the software portfolio, saying enterprise license agreements sparked 10% growth in software revenues and a 30% growth in transaction volumes in the fourth quarter of 2019. The result was that 2020 was “a trough year,” he said.

“Our volumes came in pretty much what we expected,” he said. The revenue figures disguised what he said is strong pent-up performance, with a software renewal rate of $17 billion in the quarter.  “We had the strongest renewal rate in our software business in 10 years,” he said.

Kavanaugh also challenged the perception that IBM is not holding its own in cloud computing. “We’re capitalizing on the shift to the cloud. We have a $25 billion cloud business growing 20%,” he said. “But what happened to software is that, given the uncertainty, clients are unwilling to commit to long-term deals.”

Krishna highlighted the positives in his quarterly summary: Some 2,800 customers are using IBM’s cloud platform, up 40% from the previous year. The new telecommunications cloud, which is IBM’s second industry-specific cloud offering, has added 35 partners since its November launch, although he provided no detail on revenue or customers.

The company has more than 30,000 customers of its artificial intelligence platforms and has completed seven acquisition since October. It also expects to produce a quantum computing platform comprising at least 1,000 qubits — a measure of quantum processing power — by 2023, the CEO said.

Analyst Bola Rotibi, research director for software development at CCS Insight Ltd., said IBM is doing the right things strategically. “When you take a look at IBM’s client growth — over 1,000 since the acquisition of Red Hat — the strategic partnerships and acquisitions and the investment in industry clouds you can’t dismiss the growth potential that IBM offers,” she said. But absent mitigating circumstances, the company needs to achieve the growth goals it has outlined or “it will have some tough questions to answer about its long-term operations.”

Red Hat to fuel growth

Krishna called hybrid cloud “a $1 trillion opportunity with less than 25% of workloads having moved.” Executives said the Red Hat Inc. acquisition is paying dividends in that market, with growth of 18% in 2020.

“I was impressed with Red Hat’s performance, the 45% growth in ‘large deal’ bookings, cross-sell expansion, and increased backlogs,” said Patrick Moorhead, president of Moor Insights & Strategy. “This is exactly where you would want growth coming from, as Red Hat determines the company’s future.”

“Red Hat’s growth is an indication that one of the big bets Arvind is making is still on track with a clear trajectory for revenue growth and margin growth,” agreed Forrester Research Inc. analyst Ted Schadler.

On a product category basis, IBM’s giant services business, which comprises more than half of the company’s revenues, had a rough quarter, with Global Business Services revenues down 2.7% to $4.2 billion and Global Technology Services revenues of $6.6 billion, down 5.5%.

Krishna assured analysts that growth is just around the corner. “GBS is going to return to pre-pandemic levels by midyear and we expect it to accelerate into 2022,” he said. The company’s investment in building a ecosystem of partnerships with independent software vendors like Salesforce.com Inc., Adobe Systems Inc. and Workday Inc. “will drive a lot of our services work,” he said.

IBM’s total cloud revenue was $7.5 billion in the quarter, up 8% when adjusted for divested businesses and currency rates. The Cloud & Cognitive Software segment, which includes Red Hat, cognitive applications and transaction processing platforms declined 4.5%, to $6.8 billion, dragged down by the 24% plunge in mainframe sales that was expected. The Cloud & Data Platforms segment grew 9%, led by Red Hat, but cognitive applications sales were flat as IBM continues to struggle for growth in the data analytics market.

Photo: Robert Hof/SiliconANGLE