IBM beats Q4 expectations with Red Hat bolstering software sales

IBM said its cloud and cognitive software revenue -- which includes Red Hat -- was up 8.7% to $7.2 billion.

IBM published its fourth quarter financial results on Tuesday, with a full quarter of Red Hat now in the fold. The company is showing signs of a return to growth, although year-over-year revenues were up just slightly for the quarter and still down overall for 2019.

For Q4, IBM reported a non-GAAP EPS of $4.71 on revenue of $21.8 billion, up 0.1% year-over-year. Analysts were expecting earnings of $4.68 per share on revenue of $21.64 billion.

For the full FY 2019, non-GAAP earnings per share came to $12.81 on revenues of $77.1 billion, down 3.1 year-over-year. The fiscal results are in line with analyst estimates. Shares of IBM were up nearly 5% after hours. 

"We ended 2019 on a strong note, returning to overall revenue growth in the quarter, led by accelerated cloud performance," said IBM chief executive Ginni Rometty. "Looking ahead, this positions us for sustained revenue growth in 2020 as we continue to help our clients shift their mission-critical workloads to the hybrid cloud and scale their efforts to become a cognitive enterprise."

Cloud and cognitive software revenue -- which includes Red Hat -- was up 8.7% to $7.2 billion. Red Hat specifically contributed $573 million to IBM's cloud and software sales. Red Hat revenue, normalized for historical comparability, came to $1.06 billion.

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Meanwhile, systems revenue climbed 16% led by the IBM Z, IBM's smaller footprint mainframe that utilizes design thinking. Storage systems showed growth but technology services revenue in the quarter fell 4.8%. Global business services sales were down 0.6%.

Also see: IBM launches z15 mainframe, aims to automate compliance via Data Privacy Passports

IBM said cloud revenue was $21.2 billion for fiscal 2019, up 11%. Going forward, a goal for IBM will be stoking Red Hat revenue and synergies and capitalizing on the expected growth in enterprise software investments. 

"IBM had a stellar quarter driven by systems and Red Hat," said Patrick Moorhead, principal analyst at Moor Insights and Strategy. "The double-digit systems growth was driven by its new z15 mainframe which had pent up demand and it appears that the Red Hat 'goodness' is kicking in. While revenue was flat, at least it wasn't down as we saw with other enterprise plays. I can see in a quarter or two that IBM gets back to overall growth. It has one of the better cloud value propositions, and what appears to be a growing Red Hat asset."

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As for the outlook, IBM said it is on track to deliver non-GAAP earnings of at least $13.35 a share with free cash flow of about $12.5 billion for fiscal 2020.

"After completing the acquisition of Red Hat, and with strong free cash flow and disciplined financial management, we significantly deleveraged in the second half," said James Kavanaugh, IBM 's chief financial officer.

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