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IBM Counts on Red Hat for Cloud Growth

Posted on Monday, Jul 22nd 2019

Earlier this week, IBM (NYSE: IBM) announced its second quarter results that saw improvement in its Cloud metrics. But the increase in Cloud revenues could not offset the decline in its legacy business.

IBM’s Financials
Revenues for the second quarter fell 4.2% to $19.16 billion, marginally shy of the Street’s forecast of $19.17 billion for the quarter. This was the fourth straight quarter of revenue decline for the company.

Net income was $2.5 billion, compared with $2.4 billion a year ago. Adjusted earnings of $3.17 per share was significantly ahead of the market’s estimated earnings of $3.07 per share.

By segment, Cloud and cognitive services revenue grew 3% to $5.65 billion, ahead of the market’s forecast of $5.55 billion. Its largest business segment global technology services fell 6.7% to $6.84 billion and missed the market’s estimated revenues of $7 billion. Global business services revenue grew 0.5% to $4.16 billion and fell short of the analysts’ expected $4.17 billion. Systems revenue fell 20% to $1.75 billion again falling short of the Street’s estimated $1.82 billion. Global Financing revenues fell 11% to $351 million.

IBM reaffirmed its guidance to end the current year with an EPS of at least $13.90 per share, in line with the Street’s forecast.

IBM’s Red Hat Acquisition

IBM completed its $34 billion acquisition of Red Hat earlier this week, but it has not yet included Red Hat’s performance in its financials. The market is waiting eagerly to see how Red Hat integrates with IBM, but IBM declined to comment about the financials on its earnings call. IBM will issue an update to its financial outlook later next month to include the impact of Red Hat. IBM is counting on Red Hat to help it leapfrog its presence in the hybrid cloud market.

IBM is already seeing benefits from the addition of Red Hat. Earlier this week, it announced a multi-billion dollar strategic tie-up with AT&T that leverages Red Hat’s capabilities. As part of the agreement, AT&T will use IBM’s expertise to modernize AT&T’s internal software applications to help migrations to the IBM Cloud. Additionally, IBM will provide infrastructure to support AT&T Business applications, and AT&T Business will utilize Red Hat’s open source platform to manage workloads and applications. AT&T hopes to improve its enterprise customer service through the IBM deal.

In return, IBM will make AT&T Business its primary provider of software defined networking. AT&T Business will work with IBM to transform its networking solutions with its latest technologies including 5G, Edge Compute, IoT, and multi-cloud capabilities using Red Hat. Together, IBM and AT&T plan to offer a flexible tool that can better analyze data and process low-latency, high-bandwidth applications. The alliance will help customers convert data into actionable intelligence and deliver unique digital experiences and smarter operations.

IBM’s stock is currently trading at $149.68 with a market capitalization of $132.71 billion. It touched a 52-week high of $154.36 in September last year and a 52-week low of $105.94 in December last year.

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