There were a lot of lean years for IBM when the company posted 22 straight quarters of declining revenues, an agonizing period that stretched from 2012 to 2017. Even over the subsequent years, meaningful growth was hard to find. But for the second straight quarter, Big Blue has begun to change the narrative, posting revenue growth of more than 8% in the first quarter.
That rate of growth was even stronger than what IBM recorded in Q4 2021, when it grew by 6.5%, a result that TechCrunch described as accelerating growth. (IBM also grew in Q3 2021, but a mere 0.3%, effectively unchanged.)
Shares of IBM, up more than 2% yesterday during regular trading, rose again this morning, adding more than 2% yet again in pre-market turnover. It was up seven points in morning trading as we published this post.
Red Hat, the company IBM bought in 2018 for $34 billion, led the way with revenue growth of 18% in the first quarter compared to year-ago results. When the technology giant bought Red Hat, the idea was to bring the venerable organization into the modern age, letting it continue to run as a quasi-independent entity while taking advantage of the growth engine. It appears to be working as planned, with Red Hat performing strongly.
A goal of buying Red Hat was to allow IBM to act as a consultant, rather than trying to compete directly with Amazon, Google and Microsoft in the public cloud infrastructure business. The idea is to be the company that helps customers keep things running across on-prem and public cloud operations; maybe not exactly an original idea, but one that seems to be paying off.
Consider that IBM’s hybrid consulting business also grew 24% in the first quarter, even more growth than it squeezed out of Red Hat, showing that it can sell the software and the services with it, something that has been an IBM business hallmark for years, including during its long period of decline. Now the newer strategy introduced by CEO Arvind Krishna appears to be working in its favor.
But can the company keep this modest momentum going, allowing for decent — if not spectacular — growth in the coming quarters?
The future looks brighter
In its earnings report, IBM said that it expects “constant currency revenue growth at the high end of the mid-single digit range.” How does that compare to investor expectations? Yahoo Finance indicates that the average analyst expectation for the company is that it will generate $60.69 billion worth of revenues this year or 5.8% more than the $57.35 billion it generated in 2021.
In simpler terms, IBM is forecasting growth that appears to be greater than what the street expects.
Overall, IBM’s hybrid business grew a brisk 17% while generating almost $5 billion for the quarter, but it wasn’t all good news. For instance, the company’s infrastructure revenues came in flat at $3.2 billion (inclusive of sales to Kyndryl, the infrastructure consulting business it spun out in late 2021). IBM also said it endured a nominal loss from cutting off business with Russia after its invasion of Ukraine, and that it was feeling the increased cost of doing business, particularly in regard to the price of human talent.
Patrick Moorhead, founder and principal analyst at Moor Insight & Strategies, sees continued growth ahead, especially with the new z16 mainframe as an additional area that could push growth for the company in the coming quarters.
“I think IBM can still do better in the cloud, but it was a good quarter. I’m expecting a very strong next two quarters when the z16 platform demand kicks in,” Moorhead told TechCrunch.