IBM Revenue: Red Hat, Hybrid Cloud, Consulting and Kyndryl Drive Growth – CRN | Region & Cash

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Wade Tyler Millward

“We think and we believe — and the last few quarters have confirmed this — that demand for technology will remain four or five points above GDP,” IBM CEO Arvind Krishna said during the company’s earnings call on Tuesday.





Red Hat, the hybrid cloud platform, consulting, and recent IBM spinoff Kyndryl helped propel the tech giant’s revenue growth in the most recent fiscal quarter.

Meanwhile, the Armonk, NY-based company quantified the revenue lost from Russia due to the country’s invasion of Ukraine. While IBM recorded about $300 million in revenue from Russia in 2021, the company does not expect any revenue from Russia this year.

IBM briefed investors and analysts on Tuesday during its earnings release for the fiscal quarter ended March 31, the first quarter of IBM’s fiscal year. When asked about a possible recession in the US, Arvind Krishna, IBM chairman and CEO, predicted that tech sales can withstand any hit to the economy.

“We think and we believe – and the last few quarters have confirmed this – that demand for technology will remain four or five points above GDP [gross domestic product]’ said Krishna. “Even if GDP falls too flat, or there is a quick recession or a very mild recession, we see that demand remains strong and will continue. Well, I’ll admit when we have something far more catastrophic, it’s different. But with all the scenarios that we outline and consider, we see that demand will remain in a growth phase for the foreseeable future.”

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Here’s a look at IBM’s performance for the quarter.

Ukraine, Russia and recession

Last year, Russia contributed about $300 million in revenue and $200 million in cash to IBM in profits, IBM CFO James Kavanaugh said. Most of its revenue came from high-end infrastructure and software.

IBM does not expect any revenue from Russia in 2022 due to the invasion of the country in Ukraine.

When asked about the potential impact on IBM’s business in Europe, Krishna said demand “remains strong.”

“We are much more involved with fundamental transformations at our customers and with the focus on financial volumes in critical systems – telecom, utilities, healthcare, government – we tend to see that the demand profile in Europe remains strong at the moment,” Krishna said.

He added: “Our primary focus is on the safety of our employees. IBM is providing assistance, including relocation assistance and financial support for IBM employees in the area, as well as donations from our employees around the world to charitable organizations.”

Krishna said he forecast that demand for technology “will remain strong” even if the US were to experience a recession later this year.

“We think and we believe – and the last few quarters have confirmed this – that demand for technology will remain four or five points above GDP [gross domestic product]’ said Krishna. “Even if GDP falls too flat, or there is a quick recession or a very mild recession, we see that demand remains strong and will continue. Well, I’ll admit when we have something far more catastrophic, it’s different. But with all the scenarios that we outline and consider, we see that demand will remain in a growth phase for the foreseeable future.”

software

IBM added 200 hybrid cloud platform customers during the quarter, bringing the total to more than 4,000, according to the company.

Hybrid cloud revenue reached $5 billion in the first quarter, up 17 percent year over year. Full-stack cloud capabilities from infrastructure to consulting brought in $20.8 billion in trailing 12-month revenue.

Red Hat revenue increased 21 percent year over year for the quarter. During the quarter, the company announced a new partnership with Nvidia around AI-powered applications in the data center, edge and public clouds.

Automation revenue increased 5 percent due to AIOps (AI operations), management and integration. Kavanaugh said the shortage of IT-savvy workers was partly due to customer demand.

Revenue from IBM’s data and AI offerings grew 4 percent. Transaction processing grew 31 percent year over year. And annual recurring revenue from hybrid platforms and services grew 9 percent year over year.

Security revenue increased 8 percent. In November, IBM bought security company ReaQta as part of its investment in new security offerings.

IBM completed three acquisitions during the quarter: Envizi, Neudesic and Sentaca.

advisory

With the spin-off from Kyndryl, IBM retains a consulting wing to help bring its products to customers. And given the segment’s strong performance this quarter, IBM raised its guidance on the revenue advisory the tech giant will bring. “We’re now expecting a pre-tax margin of close to 10 percent, which is up a few points year over year,” Kavanaugh said. “This reflects the improved performance in the second half as we realize price increases in our contracts.”

The company’s 2021 investments in employee skills, abilities and ecosystem partnerships prepare for the high demand for consulting services in 2022, he said.

“Consulting, as I’ve always said, is the tip of the spear that offers tremendous value in leveraging IBM technology and driving the scaling and adoption of our hybrid cloud platform – when you then couple that to the inflationary environment , see the pressure on our gross margins,” Kavanaugh said.

He continued, “When we saw this robust demand environment, we invested a significant amount of skill and capacity. In the early innings of this you underutilize. We knew that. Therefore we had to optimize and streamline our G&A structure. By the way, the reinvention of IBM through automation, digitization – everything that our customers do – we did within IBM. That has mitigated the impact on profit overall.”

It will take a few quarters for the value of a change in IBM consulting pricing to be felt, Kavanaugh said.

Consulting reported revenue of $4.8 billion for the quarter, up 17 percent year-over-year, on bookings up 40 percent, according to IBM. Consulting hybrid cloud revenue reached $8.3 billion in the trailing 12 months, up 32 percent, accounting for 45 percent of the consulting business.

The consulting segment roughly doubled its Red Hat-related signings year-over-year. Kavanaugh said the Red Hat practice has nearly $4.5 billion in revenue from inception to date. The consulting segment also accounts for between 20 and 40 percent of Cloud Pak’s revenue for IBM.

IBM grew its revenue from strategic partnerships “at double digits,” with Salesforce, SAP, Amazon Web Services and Microsoft Azure leading the growth.

Business Transformation, the largest category within IBM Consulting, brought in $2.3 billion for the quarter, up 19 percent year over year. Application Operations brought in $1.6 billion, up 14 percent. And the technology consultancy brought in $1 billion, a 19 percent growth.

infrastructure

IBM’s infrastructure revenue was about the same at $3.2 billion. Hybrid infrastructure contributed $1.7 billion of that revenue, down 2 percent year over year.

Distributed infrastructure grew 8 percent year-over-year driven by customer demand for S/4HANA – SAP’s ERP offering – and data-intensive workloads on high-end IBM Power10 systems. zSystems fell 18 percent year over year.

IBM is in Q11 z15 availability. Kavanaugh said IBM shipped more z15 million instructions per second (MIPS) than “in any other program.”

“Our installed MIPS capacity has now increased by over 45 percent over previous programs,” said Kavanaugh. “We have about 80 million MIPS in circulation today. This is our chance to deliver tremendous value to our customers, but also to monetize that value in many different ways.”

Earlier this month, IBM announced the z16 mainframe platform, built for cloud-native development, cybersecurity resiliency and with an on-chip AI accelerator, Krishna said.

“The z16 demonstrates our ability to drive critical innovation on a platform that remains essential to the global economy,” he said.

The release of the z16 late in the second quarter should mean performance above IBM’s infrastructure model for the year, plus about 5 percentage points from sales to Kyndryl.

Kavanaugh also said IBM does not expect any supply chain disruptions when shipping the z16s.

“Our working capital in the first quarter was actually a use of cash as we prudently built our inventories, especially given the supply chain disruption in the market,” he said. “We have secured our supplies for the anticipated z16.”

Kyndryl

Kyndryl — the independent, publicly traded, recent spin-off formerly known as IBM’s managed infrastructure business — contributed about 50 percent of IBM’s growth for the quarter.

Overall, IBM posted 11 percent growth and $14.2 billion in revenue for the quarter. About 5 percentage points of the growth came from incremental sales to Kyndryl.

Incremental sales to Kyndryl contributed 8 percentage points to the 15 percent growth in software revenue during the quarter. Software had sales of $5.8 billion.

Kyndryl contributed approximately 28 percentage points to transaction processing revenue growth, which reported revenue growth of 31 percent year-over-year.

And Kyndryl contributed about 1.5 points to the 10% year-over-year growth of hybrid platforms and solutions.

“As such, IBM is growing both with incremental sales of Kyndryl and with our broader customer base at the end of a mainframe product cycle, and we’re quite pleased with the operational leverage we’re seeing in our business,” said Kavanaugh.

IBM shares traded at about $131 after the close on Tuesday, up about 4 percent from the opening price of $125.75 per share.


    Learn more about Wade Tyler Millward

Wade Tyler Millward

Wade Tyler Millward is Associate Editor for cloud computing and the channel partner programs for Microsoft, IBM, Red Hat, Oracle, Salesforce, Citrix and other cloud providers. He can be reached at wmillward@thechannelcompany.com.


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