The Six Five team discusses IBM’s growth in the first quarter of the fiscal year. There is good reason to be encouraged by the numbers.
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Transcript:
Daniel Newman: We’re talking about IBM, IBM earnings, and I’ll kick this one off. So this company is about to spin-off its managed infrastructure business. They named it this quarter, Kyndryl. I think we should have a show, by the way, to talk about that name. I’m not sure how I feel about it. Hide your Kyndryls or give it to your kids when they have a bee sting. I’m not sure, but the name needs to sit with me a little, needs to marinade. It’s kind of like when a vehicle manufacturer comes out with a new body style, and you’re like, “Oh, I like the old one better.” But then at some point, it just becomes the body style, and you realize that they’re just smarter than you. So maybe there’s something going on here. So we need to spend some time. But this quarter, IBM overshot the expectation, $1.77 vs. $1.63 on revenue, beat the top line, narrowly $17.73 billion vs. $17.35, which was expected.
So, good news, 0.9% growth, if you don’t adjust for constant currency, and again, some people do some, people don’t. If you adjust, it was actually a slight decline. The reason I mentioned this is, their company is coming off of almost, I believe, it’s a year straight of declines in revenue, and everybody’s eyes are all over IBM. Can they get back to growth? So, even if it’s slow growth, it is growth, and having the earnings grow is good as well. Some good highlights this quarter, Pat. You had some very significant progress in the cloud revenue growth. They showed about 18% specifically in cloud revenue. That was important, they couple of Cloud and Cognitive services, and when they put that all together, it’s not 18%, but there’s a lot of parts and pieces in that number. By the way, that’s kind of commonplace. You look at Oracle or you look at Microsoft Intelligent Cloud. None of them are just talking about pure cloud. So, you have to really be able to discern those numbers. Another really great number, Pat, was in the systems.
Patrick Moorhead: Hey Daniel, what is pure cloud though? It’s like-
Daniel Newman: Well, you’re not going to ask me that now, we’re going to have a 47, I’m going to draw a picture of a stack. It’s going to start at… Hey, by the way, chips and SaaS. That’s the answer to everything by the way. Pull the string behind my head, “Hey, what’s hot?” Chips and SaaS. That little things fall from the sky. Just let me have one or two more things, I’ll leave a little oxygen for you, Pat. The systems group grew on a very slim margin, but the Z. So last quarter, Z had a very soft number, and we all know we’re in the 15th generation. Z15 is what they’re calling it. Zed 15, whatever, however you really want to say it, but at almost 50% growth. And so this is huge because, for all the naysayers that have said the mainframe is dead? It’s still very, very much alive.
And this company, by the way, IBM, its focus is all about enterprise hybrid cloud solutions, meaning they’re not trying to compete in every place where Azure is playing, Google is playing or AWS. They’re really trying to be very steadfast. They’re being very [verticalized]. So you look at things like IBM and their financial services cloud and what they’re trying to accomplish. They’re looking at regulated industries.
They’re looking at building workloads that really think from prem to cloud, very control plane-friendly, the cloud packs and services building prebuilt services that take into consideration regulatory and compliance needs. And then on top of that, security driven, very security driven. The hyper-protect services, confidential computing, all at the core of what the company is trying to do. So, I see it.
There’s a kind of a lagging indicator effect that its transformation to cloud under Arvind Krishna and Jim Whitehurst, the president, is really something that you have to give some time. Kind of like we’ve done with Intel. We’re talking about 2023 and IDM 2.0, and everybody’s feeling really positive about it. Well, you don’t pivot a massive strategy of a company who did business one way to another, and expect all of to happen in six to 12 months. This is going to take some years, but with Red Hat showing double digit growth and with the company spinning off the Benadryl, Kyndryl, whatever, Kyndryl, and getting out of a business that’s been kind of a boat anchor on its numbers, quarter over quarter, big revenue number and it doesn’t grow, is going to give IBM a chance to return to a mid single or even high single digit growth, which is what, I believe, the market is looking for.
Patrick Moorhead: You did leave some oxygen here, and I appreciate this, but hey, we do kind of lead lag topics and this was your topic, and you did a great job on it. Here’s the thing. I think industry analysts play a huge role in this. I think financial analysts are going to pick the scab of a 1% growth, a 1% lag. I mean, we’re in the middle of a pandemic, and quite frankly, if you don’t have a very large SAS play or you’re not in collaboration or devices, you’re probably not going to do very well. And IBM is in none of those. Okay. So seeing any growth, Daniel, to me is a plus. The things that I’m looking at are Red Hat. I’d love to see Red Hat double digit, but then again, when I look at Cloud and Cognitive Software that grew 34%, this is basically the high running software.
This is true cloud software or your definition, and then I see, just coming out of the blue, a 49% growth in Z. Now, systems rolling up 2% and I need to do a little bit more research on this OS revenue. So, operating system revenues were down a huge amount that pulled down that overall systems revenue. And that could potentially be a, “Hey, I’m trading IBM OS for Red Hat OS so, we move the bucket. And actually for Z, that would be a huge, huge, huge strategically positive thing. So, I need to dive into that a little bit. It is concerning to see power to continue to slide. There are some things that power brings that quite frankly, a X86 doesn’t bring to the table with AMD and Intel. So, it’s kind of a head-scratcher for me, the power new architecture coming up. They announced at a recent chip conference, though it gives me a lot of a lot of hope, because the technology is better in some ways, but then again, the best technology doesn’t always win.
Daniel Newman: Absolutely. And the IBM, it’s called the hard platform, their chip platform, the whole thing, a lot people don’t realize, but there was a recent announcement of an Intel partnership. When it comes to you, I think the earliest, some of the earliest seven nanometer prototypes, IBM was involved. You and I obviously have so much chip stuff coming on. Just wait till you see our Six Five Summit lineup, by the way. Sorry, I can’t say anything else, but IBM is bigger in this space than a lot of people realize. But overall, like I said, I think that shift to hybrid matters, that Red Hat deal continuing to show double digit revenue year over year in growth, continuing to win and winning alongside, by the way the AWS is and Microsoft is and being part of these deals, is going to be very, very important for IBM’s long-term growth with this enterprise hybrid cloud strategy.
Author Information
Daniel is the CEO of The Futurum Group. Living his life at the intersection of people and technology, Daniel works with the world’s largest technology brands exploring Digital Transformation and how it is influencing the enterprise.
From the leading edge of AI to global technology policy, Daniel makes the connections between business, people and tech that are required for companies to benefit most from their technology investments. Daniel is a top 5 globally ranked industry analyst and his ideas are regularly cited or shared in television appearances by CNBC, Bloomberg, Wall Street Journal and hundreds of other sites around the world.
A 7x Best-Selling Author including his most recent book “Human/Machine.” Daniel is also a Forbes and MarketWatch (Dow Jones) contributor.
An MBA and Former Graduate Adjunct Faculty, Daniel is an Austin Texas transplant after 40 years in Chicago. His speaking takes him around the world each year as he shares his vision of the role technology will play in our future.
