IBM's first quarter results get a boost from Red Hat

While total revenues were down for the quarter, IBM's cloud business saw solid growth, thanks in part to Red Hat.
Written by Stephanie Condon, Senior Writer

IBM's first quarter financial results saw a boost from Red Hat, the company reported Monday, though total revenues for Big Blue were still down year-over-year. The results are the first quarterly report since IBM's new leadership took the helm, bringing with them a renewed focus on hybrid cloud. 

IBM's Q1 non-GAAP earnings per share came to $1.84 on revenue of $17.6 billion, down 3.4 percent year-over-year. 

Analysts were looking for earnings of $1.79 on revenue of $17.62 billion. 

Revenue from the Cloud and Cognitive Software business -- which includes Cloud & Data Platforms like Red Hat, as well as Cognitive Applications and Transaction Processing Platforms — totaled $5.2 billion, up 5 percent. Growth in Cloud & Data Platforms was up 32 percent, led by Red Hat. 

More specifically, Red Hat revenue was up 18 percent. The number of Red Hat large deals was up from the fourth quarter and up about 50 percent over last year. Red Hat signed the largest deals in its history, CFO  Jim Kavanaugh said on a conference call, "leveraging IBM's deep client relationships." 

 Kavanaugh added, This is a great proof of the value of IBM and Red Hat together. We see it in the larger Red Hat deals, in the pipeline of IBM services engagements based on Red Hat's technologies and in the number of clients now using Red Hat and IBM's container solutions. This has grown to over 2,200 as Red Hat and IBM have emerged as the leading container platform."

All told, IBM said its cloud revenue for the quarter came to $5.4 billion, up 19 percent. For the last 12 months, cloud revenue was $22 billion, up 13 percent. 

"IBM remains focused on helping our clients adapt to the immediate challenges of the COVID-19 pandemic, while we continue to enable them to shift their mission-critical workloads to hybrid cloud and expand their use of AI to help transform their operations," CEO Arvind Krishna said in a statement. "Our first-quarter performance in cloud is a reflection of the trust clients place in IBM's technology and expertise today, and positions us to continue building an enduring hybrid cloud platform for the future."

On Monday's conference call, Krishna added that IBM entered the quarter in a good position. "However, in the last few weeks, we faced a shift in client priorities towards the preservation of capital," he said, adding that this impacted software disproportionately while other parts of the business maintained modest momentum. 

Still, he said, "We are entering this challenging environment from a relative position of strength... I believe that what we are going through today, with the shift to remote work, automation, application modernization, will accelerate our client shift to hybrid cloud."

Krishna, a key architect of IBM's $34 billion Red Hat acquisition, stepped into the role earlier this month after leading IBM's Cloud and Cognitive Software unit. Meanwhile, former Red Hat CEO Jim Whitehurst is now serving as president of IBM, heading up IBM Strategy as well as the Cloud and Cognitive Software unit.

On his first day as CEO, Krishna published a letter to employees, declaring that "Hybrid cloud and AI are two dominant forces driving change for our clients and must have the maniacal focus of the entire company."

First quarter revenue from IBM's Systems segment, which includes systems hardware and operating systems software, rose 3 percent to  $1.4 billion. Revenues from IBM Z, IBM's smaller footprint mainframe, were up 59 percent and Storage Systems revenue increased by 18 percent.

Global Business Services revenue (which includes Consulting, Application Management and Global Process Services) was  $4.1 billion, flat year-over-year. Consulting revenue was up 4 percent. 

Global Technology Services (which includes Infrastructure & Cloud Services and Technology Support Services) brought in revenues of $6.5 billion, down 6 percent. 

Global Financing revenues were down 26 percent to $299 million, reflecting the wind-down of OEM commercial financing.

In light of the current COVID-19 crisis, IBM said it is withdrawing its full-year 2020 guidance. "The company will reassess this position based on the clarity of the macroeconomic recovery at the end of the second quarter," the company said. 

Krishna reiterated his confidence in IBM's business regardless of the overall economic situation. 

"In different scenarios, we have ample free cash flow and liquidity to support our business and secure our dividend," he said. 

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