There were many of lean years for IBM as the company posted 22 consecutive quarters of declining revenue, a painful period stretching from 2012 to 2017. Even in the ensuing years, meaningful growth was hard to find. But for the second straight quarter, Big Blue has begun to change the story, with revenue growing more than 8% in the first quarter.
That growth rate was even stronger than what IBM recorded in the fourth quarter of 2021, when it grew 6.5%, a result Marketingwithanoy described as accelerating growth. (IBM also grew in Q3 2021, but only 0.3%, essentially unchanged.)
Shares of IBM, which were up more than 2% in regular trading yesterday, rose again this morning, adding more than 2% to pre-market sales again. It was 7 points higher in morning trading when we published this post.
Red Hat, the company that IBM bought for $34 billion in 2018, led the way with revenue growth of 18% in the first quarter compared to a year ago. When the tech giant bought Red Hat, the idea was to bring the venerable organization into the modern age so that it could continue to run as a quasi-independent entity while taking advantage of its growth engine. It seems to be working as planned, with Red Hat performing strongly.
One purpose of the Red Hat purchase was to allow IBM to act as a consultant, rather than attempting to compete directly with Amazon, Google and Microsoft in public cloud infrastructure. The idea is to be the company that helps customers run business on-premises and in the public cloud, maybe not exactly an original idea, but one that seems to be paying off.
Recall that IBM’s hybrid consulting business also grew 24% in the first quarter, even more than it squeezed Red Hat out, showing that it can sell the software and services with it, something that has been an IBM business hallmark for years. including during its long period of decline. Now CEO Arvind Krishna’s newer strategy seems to be working in his favor.
But can the company sustain this modest momentum and allow for significant – if not spectacular – growth in the coming quarters?
The future looks brighter
In its earnings report, IBM said it expects “constant growth in currency revenues at the high end of the mid-single digit range.” How does that compare to investor expectations? Yahoo Finance says the average analyst forecast for the company is $60.69 billion in revenue this year, or 5.8% more than the $57.35 billion it generated in 2021.
In simpler terms, IBM predicts growth that appears to be greater than what the street expects.
Overall, IBM’s hybrid business grew a solid 17% as it generated nearly $5 billion for the quarter, but it wasn’t all good news. For example, the company’s infrastructure revenues were $3.2 billion (including the sale to Kyndryl, the infrastructure consulting firm founded in late 2021). IBM also said it suffered a nominal loss from cutting business with Russia after the invasion of Ukraine, and that it felt the increased cost of doing business, especially with regard to the price of human talent.
Patrick Moorhead, founder and principal analyst at Moor Insight & Strategies, sees continued growth ahead, especially with the new z16 mainframe as an additional area that could fuel the company’s growth in the coming quarters.
“I think IBM can still do better in the cloud, but it was a good quarter. I expect a very strong next two quarters as demand for the z16 platform kicks in,” Moorhead told Marketingwithanoy.