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Jan 24, 2022

IBM posts best sales growth in 10 years on cloud demand

Barry Schwartz discusses IBM

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International Business Machines Corp. reported revenue that beat analysts’ estimates, buoyed by strong demand in the software unit, which includes IBM’s hybrid-cloud offering, signaling that the company’s efforts to transform the 110-year-old tech giant are bearing fruit.

Sales rose 6.5 per cent to US$16.7 billion in the three months ending Dec. 31, the Armonk, New York-based technology company said Monday in a statement. It was the biggest increase in at least 10 years. Analysts were expecting US$16 billion, on average, according to data compiled by Bloomberg. The stock jumped as much as 7.5 per cent in extended trading before giving up much of the gains.

“This is the start of the new IBM and perspective on what we look like going forward,” Chief Financial Officer Jim Kavanaugh said in an interview. “We saw a very healthy acceleration in cloud and consulting which are key growth areas.”

IBM’s software unit, the biggest business group, grew 8.2 per cent to US$7.3 billion. The consulting unit, formerly known as Global Business Services, reported US$4.7 billion in revenue, a 13 per cent increase compared with the year prior. 

The results were the first since IBM completed the spinoff of a large portion of its legacy infrastructure services unit in November into a new company called Kyndryl, which includes service operations like managing client data centers and traditional information-technology support. The divestment marked IBM’s fourth major transformation and a significant step in Chief Executive Officer Arvind Krishna’s plan to pivot Big Blue into cloud and artificial intelligence.

Hybrid-cloud revenue grew 16 per cent to US$6.2 billion, led by Red Hat sales which increased 19 per cent during the quarter.

Krishna’s strategy to steer IBM, which traditionally focused on mainframe computers and information-technology services, into the fast-growing cloud-computing market helped revive sales after years of stagnant revenue growth. However, even as companies shift more of their operations to the internet, IBM faces competition in cloud services from giants like Microsoft Corp. and Amazon.com Inc. IBM is seeking to distinguish itself from its bigger rivals in cloud by offering a hybrid model, which assists clients in storing and computing data across on-premises infrastructure, private cloud services and servers run by public providers. 

“In the past, IBM benefited from systems not being able to integrate easily, but the cloud has changed that,” said Morningstar analyst Julie Bhusal Sharma. “The pandemic spurred companies to start migrating workloads to the cloud and since they’re doing the switch anyway, they’re going for best-in-class providers.”

Even before assuming the role of CEO at the height of the pandemic, Krishna played a key role in developing IBM’s hybrid-cloud strategy and oversaw the US$33 billion acquisition of Red Hat. This month, IBM sold a part of its Watson Health business to private equity firm Francisco Partners, scaling back the technology company’s once-lofty ambitions in health care.

Regarding any other major changes to the company’s structure post-Kyndryl, Krishna said IBM “has done a lot of the heavy lifting we need and I feel we have the right portfolio.”

IBM forecast mid-single digit revenue growth in 2022 plus a boost from incremental sales to Kyndryl of about 3 per cent. “Their guidance points to growth of about 7 per cent to 8 per cent, which is not bad for them,” said Bloomberg Intelligence analyst Anurag Rana. “Still, they are going to run into tough comparisons in the second half of the year.”

Earnings excluding some costs were US$3.35 a share, above the average analyst estimate of US$3.23. Gross margin was 56.9 per cent, beating the 56.1 per cent analysts expected.