Red Hat saved IBM’s chops this quarter

The Apptio acquisition looks even more important to IBM’s future success

Ron Miller Alex Wilhelm 7 hours

IBM reports earnings this week, and let’s be honest, the result is rather boring. The company generated about $15.5 billion in revenue, down a disappointing 0.4% from last year’s results. However, even within its lackluster report, there are some tidbits in its favor for the well-known tech giant.

On the downside, IBM’s infrastructure business was particularly sluggish with revenue down 14.6%, to $3.6 billion, compared to last year’s metrics. Those overall losses included IBM Z Systems, the company’s mainframe business, down 30% on its own. Z Systems has been pretty solid for the company in the past, so it’s sad news to see it do so poorly.

On the bright side, software revenue rose 7.2% in IBM’s most recent quarter to $6.6 billion with Red Hat leading the way up 11%, making its $34 billion 2018 purchase look better every quarter. You could even argue that without Red Hat, IBM would be far worse off.

CEO Arvind Krishna has been trying to squeeze in modest growth for his company, but Big Blue has failed to even achieve that in the second quarter.

However, as IBM is doubling down on its hybrid cloud strategy, where the goal is to act as a trusted partner to manage the infrastructure wherever it is located, there are some decent signals for the future, including anticipated revenue growth of 3 to 5% at constant exchange rates. And expects $10.5 billion in free cash flow this quarter, up $1 billion from last year’s result.

Several parts of IBM contributed to its modest growth trajectory. Despite the increase in software revenue, its consulting division had a decent report this quarter, expanding its revenue by 4.3% over last year’s result to $5 billion. Those folks help large companies manage their hybrid cloud implementations, among other things.

Recently IBM went out and spent a hefty $4.6 billion on Apptio, which makes software to help better understand where resources are being allocated, either on-premises or in the cloud. The deal isn’t expected to close until later this year, but it’s clear that it could be a way to squeeze additional revenue out of the hybrid cloud approach, and it could add a layer of revenue to the company’s future results that will improve year-over-year comparisons in the future.

What about AI?

IBM also sees AI as being closely linked to its hybrid strategy. In May the company introduced a Watson update, an artificial intelligence platform called Watsonx that leverages a new generation of big language models. While IBM squandered its start with Watson, it emerged in 2011 with its own the famous “Jeopardy” victoryhopes to capitalize on the renewed interest in AI.

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