IBM reported revenue that beat analysts’ estimates, buoyed by strong demand in the software unit, which includes IBM’s hybrid-cloud offering, signalling that the company’s efforts to transform the 110-year old tech giant are bearing fruit.
Sales rose 6.5% to US$16.7-billion in the three months ending 31 December, the Armonk, New York-based technology company said on Monday in a statement. It was the biggest increase in at least 10 years. Analysts were expecting $16-billion, on average. The stock jumped about 5% in extended trading.
“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% to $7.3-billion. The consulting unit, formerly known as Global Business Services, reported $4.7-billion in revenue, a 13% increase compared to 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 centres and traditional IT support. The divestment marked IBM’s fourth major transformation and a significant step in CEO Arvind Krishna’s plan to pivot Big Blue into cloud and artificial intelligence.
Hybrid cloud revenue grew 16% to $6.2-billion, led by Red Hat sales which increased 19% during the quarter.
Krishna’s strategy to steer IBM, which traditionally focused on mainframe computers and IT 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 and Amazon Web Services. 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 $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.
Earnings excluding some costs were $3.35/share, above the average analyst estimate of $3.23. Gross margin was 56.9%, beating the 56.1% analysts expected.