IBM’s first quarterly financial release following the close of its $34 billion acquisition of Red Hat showed just how important that deal could be for the vendor.
Red Hat’s operation was one of the few bright spots for IBM during its third fiscal quarter of 2019. The newly absorbed addition posted a 20% year-over-year surge in revenue compared with when it was a separate entity. Growth from Red Hat’s Enterprise Linux (RHEL) business helped boost IBM’s infrastructure business, and its OpenShift and Ansible platforms boosted opportunities into new markets.
That boost was felt in IBM’s Cloud and Cognitive Software business were most of Red Hat’s revenue flowed, which was the only IBM division to show an appreciative growth in the quarter. The rest of its business segments were either flat or down year over year.
Forrest Research VP and principal analyst Andrew Bartels noted that IBM has done quite a bit as of late to “confuse and muddy” its financial reporting by moving around some of its business units. But overall, he explained that outside of its Red Hat operations, “it’s hard to find that it’s growing very much.”
“We are left scratching our heads and asking what’s going on,” Bartels told SDxCentral. “Services are flat, hardware is down, and technology services is down. Only its cloud and cognitive group grew, but stripping out Red Hat and that was also flat. Red Hat is the only growing part at IBM.”
Red Hat Spin
IBM CFO James Kavanaugh explained that Red Hat’s results showed the growing importance of the open source community.
“This is a great proof point of the continued importance of Linux as the foundation for enterprise workloads in a hybrid cloud environment,” Kavanaugh said during his company’s quarterly investor call, according to a Seeking Alpha transcript. “And momentum continued in application development and emerging technologies driven by both OpenShift and Ansible. We’re adding new OpenShift clients and expanding Red Hat adoption in existing clients.”
Kavanaugh also explained that IBM has hired around 1,000 new employees “to address the growing demand for the Red Hat portfolio and hybrid cloud value proposition, while employee attrition has been stable year to year.”
IBM has been quick in integrating Red Hat across its legacy platforms. The vendor launched its Cloud Paks that rely on the OpenShift platform to tie IBM’s legacy software portfolio across any cloud environment and its mainframe systems. IBM said that when combined, these products will provide a secure and open hybrid multi-cloud platform to drive new use cases.
It has also focused its long-standing z-series mainframe platform toward the cloud. This includes increased performance to deal with cloud-native systems.
Forrester Research’s Bartels said that IBM definitely has a lot of opportunity in binding its operations into Red Hat, but that it needs to be careful how it prices those opportunities.
“It will be interesting to see,” Bartels said. “Red Hat can be a vehicle to feed into IBM’s services group, but it also might make Red Hat more expensive.”
IBM’s Q3 Numbers Sink Its Stock
Overall, IBM’s revenues were down slightly year over year to $18 billion in the latest quarter. However, expenses surged $1 billion over that time period, which resulted in a similar drop in net income to $1.7 billion for the third quarter of this year.
IBM did manage to trim its debt load a bit during the quarter from around $73 billion at the time of the Red Hat deal closing to $66 billion by the end of September.
The company’s results were not unexpected, but its dour outlook outside of its Red Hat operations dragged on investors. A handful of financial analysts lowered their earnings expectations for the company and IBM’s stock has lost around 6% of its value since those earnings were released.