The Six Five team does a deep dive into the latest earnings from IBM.
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Daniel Newman: Let’s kick it over to another company that earnings had a big one. Biggest earnings growth, I believe it was in three years, Pat. IBM.
Patrick Moorhead: Yeah. So that was really the headline. Now, was it overall big 25% FANG or something like that? No, it wasn’t. But you have to start there before you can get in a rocket ship. I’m going to hit some of the highlights that I thought were important to hit. The first was CNCS cloud, 25% percent improvement. I think that’s probably one of the better comparisons to let’s say an AWS Cloud or a Google Cloud or an Azure Cloud. There was GBS Cloud that was 30%. Essentially, what that is, is all professional services that go around that.
Systems IBM Z. Z 15 versus Z 14, 100% increase, albeit overall systems was down, which I attribute primarily to the state of the roadmap. You’ve got new platforms that are in the pipeline. Free cashflow, $11 billion on an LTM basis. But finally, the big nut was Red Hat. Red Hat had 20% growth year over year. They said open shift revenue was up 3X from before the revenue and have 3,200 IBM clients on a hybrid cloud platform up 4X since acquisition closed with a $5.2 billion backlog. So net net, it’s hard to say. It would be hard for anybody to come up and say that Red Hat isn’t working out for them so far. Do I want double-digit growth top line for the entire company? Yeah, I do. But that’s just not the company that IBM is. So you’ve got to look at to me, what are the growth areas in the marketplace and how is IBM performing in those? It’s AI and it’s cloud, and IBM is doing respectable double-digit growth in cloud. AI, not so much, but I think we’re going to have to see what IBM does with AI in the future.
Daniel Newman: Yeah. A lot to unpack here. It was a good quarter for IBM. Here’s the thing, they’re on the precipice of a very big divestiture of the global technology service business, also known as Kyndryl, which has been proverbially speaking, a boat anchor on the company, has not been showing much growth, it’s heavy, it’s cost-intensive. It’s an important part of the business, but it’s been a business that doesn’t really mesh very effectively with the growth areas that are Arvind Krishna and the leadership team at IBM are focused on. They’re all in on hybrid cloud.
Hybrid cloud. That’s important to point out the difference there, because if you look at public cloud growth, if you look at the battles between AWS, Google, Microsoft, and Azure, and even Oracle, IBM is not really coming out saying, “We want to be the public cloud company,” but they’re building solutions with Red Hat, with satellites, they’re very focused on being able to win and participate in ecosystems that may have AWS, that may have Azure or Google or any of these others. The results though, I believe this quarter are going to be looked at as positive, but I think the race really starts for Arvind and team when that divestiture is complete.
As you suggested, Pat, in the areas like cloud and cognitive services, when you actually break in the service in cloud and growth, and you’re seeing 29% growth, or you’re seeing 35% in global business services, this is the potential of the company. This is the potential of growth if you focus on the areas where they have the right products, the right mix, and have been putting the acute attention over the past few years. That’s where the attention has been spent. That is where growth is coming. Of course, down the pipe, you’ve got things like IBM Quantum, which you can count on being an important long-term growth engine for the company.
As you said, I think AI, IBM was so early with bots in. I feel like it might’ve been a little bit of a missed opportunity for a more rapid growth trajectory for the company, but it has built a really strong reputation in that space, and I do hope there’s a way that the company can revive and grow that. My last ask is that I do hope the company can continue to provide greater and greater transparency, taking out any ambiguity in the cloud numbers because when you come out and you say you’re a cloud company, you want your cloud growth to always be double digit, and when you bolt it up into that big cloud number, it wasn’t 10% plus and the whole company’s not growing 10%, I can live with that. But if cloud isn’t growing 10%, I’m going to struggle with it and I guarantee you, the folks on Wall Street and the investors, and retail, and funds are going to say, “Whoa, why are they not growing faster in cloud?” So that’s something to watch.