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IBM’s New Leadership Counts on Hybrid Cloud

Posted on Wednesday, Apr 22nd 2020

IBM (NYSE: IBM) reported its first quarter results this week and it failed to impress the market. The Covid-19 crisis gripping the world has also impacted IBM significantly, and the company pulled back on its outlook for the rest of the year. This was the first result announcement under IBM’s new leadership of Arvind Krishna who took over from Ginny Rometty. The macroeconomic conditions present a tough challenge for the new leader.

IBM’s Financials
Revenues for the first quarter fell 3.4% $17.57 billion, marginally short of the Street’s estimates of $17.59 billion. Adjusted earnings of $1.84 a share fell from $2.25 a share a year ago and were better than the market’s estimates of $1.81 per share.

The company’s Cloud and Cognitive Software segment, which includes cognitive applications and cloud and data platforms like Red Hat, grew 6% to $5.24 billion. The market was looking for revenues of $5.3 billion from the segment. Overall, the company reported cloud revenues growing 19% to $5.4 billion. For the trailing twelve month period, IBM’s cloud revenues grew 13% to $22 billion.

Revenues from Global Business Services that includes Consulting, Application Management, and Global Process Services were flat at $4.1 billion. Global Technology Services revenues fell 6% to $6.5 billion and Systems revenues grew 3% to $1.4 billion. Global Financing revenues were down 26% to $299 million.

Due to the coronavirus situation, IBM withdrew its outlook for the current fiscal. It will reassess its performance based on the current quarter and then provide a revised view for the rest of the year.

IBM’s Hybrid Cloud Focus

Under the new leadership of Arvind Krishna, IBM wants to focus on two major areas for its growth – cloud and AI. In a recent letter published to its employees, he announced his focus on wanting to build an “essential, ubiquitous hybrid cloud platform” so as to become “the most trusted technology partner of the 21st century”. IBM estimates the hybrid cloud market to be a $1.2 trillion opportunity.

IBM is focusing on building this offering through its Red Hat acquisition. Together with Red Hat, IBM now has access to open source, security leadership, and deep expertise. It is establishing Linux, Containers, and Kubernetes as the new standard, which it believes, will help it win the market for hybrid cloud. It is also driving this push through leadership change as well. Red Hat’s former CEO Jim Whitehurst has now been named IBM president and head of IBM Strategy and Paul Cormier, veteran Red Hatter, has become the CEO for Red Hat. IBM wants to win the “architectural” battle for the hybrid cloud with its leadership and focus.

In the last quarter, IBM saw revenues from Red Hat grow 18%. The number of Red Hat large deals grew from the fourth quarter and were up about 50% over last year. Red Hat signed the largest deals in its history by being able to leverage IBM’s deep client relationships.

IBM already holds a strong position in the middleware, mainframe, and IT services markets. It wants hybrid cloud to be its fourth big success. Arvind believes IBM has the fundamentals in place to achieve this success. But it is a long road ahead. According to Synergy Research Group, IBM stands behind Amazon, Microsoft, and Google in the cloud space. Red Hat’s acquisition will help it tremendously. Red Hat’s OpenShift container-based development environment will help companies build cloud-native apps faster and drive infrastructure efficiency. OpenShift is available in multiple deployment models across customer data centers and public clouds and as a managed service in the IBM Cloud.

IBM’s stock is currently trading at $116.76 with a market capitalization of $103.7 billion. It touched a 52-week high of $158.75 in February this year before the market turbulence hit the stock. It hit a 52-week low of $90.56 last month.

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