IBM Q3 results underscore need to spin off legacy business

By Robert Scammell

Enterprise tech giant IBM has reported another year-on-year revenue decline in its Q3 results, but a “strong performance” in its cloud computing division.

Revenue for the quarter came in at $17.6bn, down 2.6% on the year-ago period. Net income was $2.3bn, with adjusted earnings per share standing at $2.58, or $1.89 using GAAP metrics.

These figures are in line with expectations after IBM announced preliminary Q3 estimates earlier this month.

IBM’s Q3 earnings come as the company begins the process of streamlining its business by spinning off its sluggish IT infrastructure business into a separate the company. The move, announced on 8 October, will allow IBM to focus on its more successful hybrid cloud business and artificial intelligence (AI) technologies.

Reaction to the move has broadly been positive among analysts, who point towards IBM’s acquisition of Red Hat making the company well-positioned to take advantage of hybrid cloud opportunities.

IBM currently lags behind AWS and Microsoft in the public cloud market, but believes it can gain an edge in hybrid models, which appeal to larger companies who are not ready to ditch all of their on-premise servers.

IBM Q3 results: Every cloud

Red Hat’s Q3 revenue was up 17% year on year. IBM’s Cloud & Cognitive Software segment, which encompasses Red Hat, saw revenues grow by 7% year on year to $5.6bn.

“The strong performance of our cloud business, led by Red Hat, underscores the growing client adoption of our open hybrid cloud platform,” said Arvind Krishna, IBM chief executive officer, in a statement.

“Separating the managed infrastructure services business creates a market-leading standalone company and further sharpens our focus on IBM’s open hybrid cloud platform and AI capabilities. This will accelerate our growth strategy and better position IBM to seize the $1tn hybrid-cloud opportunity.”

IBM’s Global Technology Services segment – which contains the infrastructure business that it plans to ditch – saw revenues decline by 4% to $6.5bn.

“This quarter followed the similar path of the past few quarters: strong growth in cloud-related businesses that was offset by weakness in the company’s legacy consulting-related and hardware businesses,” said Logan Purk, senior analyst at financial services firm Edward Jones.

“Despite in line quarterly results, investor focus is dialled in on the eventual spin-off of the infrastructure management business, which should return the new IBM to growth.  We think this new management team is making the right moves to reposition IBM within cloud and software markets while exiting growth-challenged businesses, which should improve the growth profile of the company longer term.”

IBM did not provide an outlook for the rest of the year. But on an earnings call, IBM chief financial officer James Kavanaugh said the company expected costs of $2.3bn in the fourth quarter associated with the spin-off.

IBM’s share price has fallen by nearly 7% since posting its earnings late on Monday evening. Its share price is down by 13% since the start of the year.


Read more: IBM quantum computing roadmap aims for 1,121-qubit machine in 2023


 

Verdict deals analysis methodology

This analysis considers only announced and completed artificial intelligence deals from the GlobalData financial deals database and excludes all terminated and rumoured deals. Country and industry are defined according to the headquarters and dominant industry of the target firm. The term ‘acquisition’ refers to both completed deals and those in the bidding stage.

GlobalData tracks real-time data concerning all merger and acquisition, private equity/venture capital and asset transaction activity around the world from thousands of company websites and other reliable sources.

More in-depth reports and analysis on all reported deals are available for subscribers to GlobalData’s deals database.

Topics in this article: ,