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IBM details Kyndryl spinoff, business reorg and earnings

IBM's third-quarter earnings report was a mixed bag, with overall cloud revenues continuing to rise, and server hardware showing a sharp downturn.

IBM's quarterly revenue meeting this week included details of the upcoming spinoff of its managed infrastructure services business, along with details on changes to its other business units.

IBM reported a slight increase in overall revenues for the third quarter, as did its Cloud and Cognitive Software and Global Business Services, but its Global Technology Services businesses came up short of analysts' expectations.

Overall IBM revenues rose to $17.62 billion from $17.56 billion in the year-ago quarter. The company's Cloud and Cognitive Software business reported revenue of $5.69 billion, with analysts expecting $5.77 billion, while its Systems business generated $1.1 billion in revenue compared with the $1.23 billion analysts expected. Global Technology Services reported $6.15 billion for the quarter compared with the $6.26 billion analysts anticipated.

Despite the mixed results, IBM chairman and CEO Arvind Krishna accentuated the positive in his remarks to financial analysts.

"We continue to make progress in our software and consulting businesses, which represent our higher-growth opportunities," Krishna said. "With our increased focus and agility to better serve clients, we are confident in achieving our medium-term objectives of mid-single-digit revenue growth and strong free cash flow generation."

Red Hat continued to be an important contributor to the growth of the company's software business, with revenue for the quarter rising 17%. IBM saw more than 40% growth in OpenShift recurring revenue, led by offerings such as Cloud Pak for Integration and Cloud Pak for Business Automation, Krishna noted.

Separation of its managed infrastructure services business, now called Kyndryl, is an important step in the company's evolution of becoming a platform-centric hybrid cloud and AI company, Krishna said.

"We continue to make progress in our software and consulting businesses, which represent our higher growth opportunities," he said.

Once the spinout of Kyndryl is complete on Nov. 3, just less than half of IBM's portfolio will consist of software, while about 35% will be consulting, Krishna said.

"Infrastructure remains an important part of our foundation," Krishna said. "The mix inside this portfolio, together with the investments we are making, -- both in acquisitions and organically -- and our existing ecosystem, will deliver the mid-single-digit revenue growth for us starting in 2022."

IBM business unit reorg

The split off of Kyndryl simplifies the structure of IBM's remaining business units now narrowed down to Consulting Services, Software and Infrastructure, IBM officials said. In the newly reorganized company, Software replaces the existing Cloud and Cognitive Software unit, Consulting Services replaces Global Business Services, and Infrastructure takes the place of the Systems group.

In preparation for the split, IBM over the past year has built up its consulting and services business by acquiring several smaller companies, each with an individual focus on a specific vendor's technology.

The acquisitions of services companies should deepen IBM's knowledge of business applications their customers are using.
Judith HurwitzPresident and CEO, Hurwitz & Associates

"These acquisitions should deepen [IBM's] knowledge of a range of business applications their customers are using," said Judith Hurwitz, president and CEO of Hurwitz & Associates LLC. "If they are dealing with a customer with investments in Workday, Salesforce or Adobe, you don't want your consulting group having to say, 'we really don't know much about that application.' That wouldn't be good."

Before the split officially takes place, IBM must go through the process of splitting long-term contracts it holds with existing users, with one half going to IBM and the other half going to Kyndryl. It is unclear if this process will result in larger corporate IT shops delaying new spending until the contract negotiations are complete, renegotiating pricing or even canceling contracts altogether.

Meanwhile, Global Business Services revenue turned in $4.4 billion, up 11.6%, but its Global Technology Services reported revenue of $6.2 billion, down 4.8%.The company's Systems business, which includes mainframes and Power servers, was down 11.9%. IBM officials said sales of its Z series mainframes dove 33%, while its Power systems plummeted 24%.

On a brighter note, IBM said its Storage Systems business grew by 11%, with cloud revenue over the past four quarters reaching $27.8 billion, up 14% or 11% adjusting for divested businesses and currency.

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