Red Hat saved IBM’s bacon this quarter


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The Apptio acquisition is looking even more critical to IBM’s future success

IBM reported earnings this week, and if we’re being honest, the results were rather uninspiring. The company generated revenue of around $15.5 billion, down a disappointing 0.4% from its year-ago result. However, even inside its less than stellar report, there were some favorable tidbits for the well-known tech giant.

On the negative side, IBM’s infrastructure business is deep in the doldrums with revenue down 14.6% to $3.6 billion, compared to year-ago metrics. That overall loss includes IBM Z Systems, the company’s mainframe business, falling 30% on its own. Z Systems has been pretty solid for the company in the past, so it’s sobering news to see it doing so poorly.

On the bright side, software revenues were up 7.2% in IBM’s most recent quarter to $6.6 billion with Red Hat leading the way up 11%, making the 2018 $34 billion purchase look better with each passing quarter. You could even argue that without Red Hat, IBM would be in much worse shape.

CEO Arvind Krishna has been looking to squeeze out modest growth for his company, but Big Blue failed to achieve even that in the second quarter.

Still, as IBM doubles down on its hybrid cloud strategy, where its goal is to act as a trusted partner to manage infrastructure wherever it lives, there are a couple of decent signals for the future, including anticipated revenue growth of 3 to 5% at constant currency rates. And it expects $10.5 billion in free cash flow this quarter, up $1 billion from year-ago results.

Several parts of IBM are contributing to its modest growth trajectory. Apart from rising software revenues, its consulting division had a decent report this quarter, expanding its top line by 4.3% compared to year-ago results to $5 billion. Those folks help large companies manage their hybrid cloud implementations, among other things.

Recently IBM went out and spent a hefty $4.6 billion to buy Apptio, which builds software to help better understand where resources are allocated, whether on-prem or in the cloud. That deal isn’t expected to close until later this year, but it’s clear that it could be a way to squeeze out additional revenue from the hybrid cloud approach, and it could add a layer of revenue to the company’s forward results that will bolster year-over-year comparisons in the future.

What about AI?

IBM also sees AI as being inextricably linked to its hybrid strategy. In May the company introduced a refresh of Watson, an artificial intelligence platform called Watsonx that takes advantage of the new generation of large language models. While IBM frittered away its head start with Watson, which emerged in 2011 with its famous “Jeopardy” victory, it’s hoping to take advantage of the new interest in AI.

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