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IBM cloud revenues climb as hardware continues to decline

IBM cloud revenues continue to increase as hardware sales drop, sharpening the company's strategy to focus on hybrid cloud.

Emboldened by the continued rise in its cloud revenues, IBM users can expect to see the company place a strong emphasis on hybrid clouds where some analysts believe it has an edge over AWS and Azure.

But not all the numbers were good. While IBM's third quarter cloud revenues reached $6.0 billion, up 19% from the same quarter last year, its hardware systems group dropped 15% to $1.3 billion, led by the declining performance of its IBM Z mainframes.

Continuing with the good news-bad news, the company reported its cloud and cognitive software revenues, which includes Red Hat and cognitive applications, rose 7% largely on the performance of Red Hat. But its Global Business Services unit only generated $4.0 billion in revenues, which is down 5% due to the underperformance of its application management and consulting business.

Another dollop of bad news was overall revenues fell for the third consecutive quarter, this time falling 2.6% to $17.6 billion compared to last year's third quarter.

"With COVID-19 affecting much of IBM's customer base, more than other competitors given its prominence in the transportation and retail sectors, it still showed growth in the cloud and AI segments," said Daniel Elman, research manager at Nucleus Research Inc. "When airlines and retail businesses are back at pre-pandemic health, it should see a sharp uptick in performance to complement this growth as these businesses increase investment in technology modernization projects."

Arvind Krishna, IBM CEOArvind Krishna

Speaking to financial analysts, IBM CEO Arvind Krishna attributed much of the rise in cloud and software revenues to large corporate accounts buying into its hybrid cloud strategy with Red Hat.

"The strong performance of our cloud business, led by Red Hat, underscores the growing client adoption of our open hybrid cloud platform," Krishna said. He pointed to 11 deals IBM signed in the third quarter, each in excess of $100 million, with eight of those deals made by the company's managed infrastructure services group.

Nucleus Research's Elman backed Krishna's optimism, saying the company has carved out a solid niche in the hybrid cloud market with decades of experience in dealing with Fortune 100 accounts, many of which have digital transformation projects underway.

"We see AWS and Azure focusing more of their attention on hybrid," Elman said. "IBM should have an advantage in this space as hybrid has been its focus for years and it has the most enterprise hardware expertise to integrate in these hybrid environments."

IBM CEO clarifies managed services spinoff goals

Krishna kicked off the meeting addressing IBM's decision to spin off the $19 billion managed infrastructure portion of its Global Technology Services business into a new public company sometime late next year. The move is designed to allow both IBM and the new company, or NewCo, to better focus on a number of cloud and AI initiatives based on Red Hat offerings, particularly its OpenShift platform.

We see AWS and Azure focusing more of their attention on hybrid. IBM should have an advantage in this space as hybrid has been its focus for years.
Daniel ElmanResearch manager, Nucleus Research Inc.

The upcoming split will give each company more agility to focus on their respective financial models and also give each of them greater freedom to partner with third parties and to better align their "capital structures to a specific strategic area," Krishna said.

"We've had a comprehensive outreach to our clients and heard back from over 200 of our top clients, many of whom I have spoken to personally," Krishna said. "The vast majority of them understand the strategy we are undertaking and they see this as an opportunity to further strengthen our go-to-market initiatives in both hybrid cloud and AI," he said.

While Krishna believes IBM and NewCo can compete successfully on their own, some analysts point out NewCo has some work ahead of it given how revenues have fallen the past several years as IBM users have moved to the cloud. The managed services group made a healthy living supporting on-premises environments.

"Frankly, I think IBM underinvested in that business and didn't take cost out as fast as they could have," said Ted Schadler, vice president and principal analyst at Forrester Research. "They didn't deliver enough stability and needed to provide more insight and strategy assistance to customers. It was a missed opportunity, but they can go back and fix that," he said.

In other business segments IBM reported that its Global Technology Services group had revenues of $6.5 billion, down 4%. The Global Financing unit, which includes financing and used equipment sales, had revenues of $273 million, down 20%. Part of the reason for the steep drop off is the winding down of OEM commercial financing, IBM said.

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