Red Hat, Hybrid Cloud, Consulting and Kyndryl fuel growth

Red Hat, hybrid cloud platform, consulting and IBM’s recent spin-off Kyndryl helped fuel the tech giant’s revenue growth in its most recent fiscal quarter.

Meanwhile, the Armonk, New York-based company quantified Russia’s loss of revenue due to the country’s invasion of Ukraine. While IBM earned about $300 million in revenue from Russia in 2021, the company expects no revenue from Russia this year.

IBM updated investors and analysts Tuesday on its earnings call for the fiscal quarter that ended March 31, IBM’s first fiscal quarter. Asked about a possible recession in the United States, IBM Chairman and CEO Arvind Krishna predicted that tech sales could weather any hit to the economy.

“We believe and we believe – and the last two quarters have confirmed this – that demand for technology is going to remain four or five points above GDP. [gross domestic product]”, Krishna said. “Even if the GDP falls too low, or if there is a rapid recession or if it is a very slight recession, we see the demand remaining strong and continuing. Now I recognize that if we have something much more catastrophic, that’s different. But for all the scenarios that we’re describing and looking at, we see that demand is going to continue in a growth phase for the foreseeable future.”

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Here’s a look at IBM’s performance for the quarter.

Ukraine, Russia and the recession

Russia brought around $300 million in revenue and $200 million in cash profits to IBM last year, IBM chief financial officer James Kavanaugh said. Most of the revenue came from high-end infrastructure and software.

IBM expects no revenue from Russia in 2022 due to the country’s invasion of Ukraine.

Asked about the potential effects on IBM’s business in Europe, Krishna said demand “remains strong”.

“We have a lot more fundamental transformations with our customers, and focusing on critical systems financial volumes (telecoms, utilities, healthcare, government), we tend to find that currently the demand profile in Europe remains strong,” Krishna mentioned.

He added: “Our primary focus is on the safety and security of our employees. IBM provides assistance, including relocation assistance and financial support to IBMers in the region, as well as matching donations from our employees around the world to nonprofit organizations.

Krishna said he expects demand for technology to “remain strong” even if the United States hits a recession later this year.

“We believe and we believe – and the last two quarters have confirmed this – that demand for technology is going to remain four or five points above GDP. [gross domestic product]”, Krishna said. “Even if the GDP falls too low, or if there is a rapid recession or if it is a very slight recession, we see the demand remaining strong and continuing. Now I recognize that if we have something much more catastrophic, that’s different. But for all the scenarios that we’re describing and looking at, we see that demand is going to continue in a growth phase for the foreseeable future.”

Software

IBM added 200 hybrid cloud platform customers during the quarter, bringing the total to more than 4,000, according to the company.

Hybrid cloud revenue hit $5 billion in the first quarter, a 17% year-over-year increase. Full cloud capabilities, from infrastructure to consulting, generated $20.8 billion in revenue over the past 12 months.

Red Hat’s revenue increased 21% for the quarter year-over-year. The company unveiled a new partnership with Nvidia during the quarter around AI-powered applications in data centers, edge and public clouds.

Automation revenue grew 5% driven by AIOps (AI operations), management and integration. Kavanaugh said the shortage of workers with computer skills was partly due to customer demand.

Revenue from IBM’s data and AI offerings grew 4%. Transaction processing increased 31% year over year. And annual recurring revenue from the hybrid platform and services grew 9% year-over-year.

Security revenue increased by 8%. In November, IBM bought security company ReaQta as part of its investment in new security offerings.

IBM made three acquisitions during the quarter: Envizi, Neudesic and Sentaca.

Consultant

With the Kyndryl spin-off, IBM retains a consulting wing to help bring its products to customers. And given the segment’s strong performance this quarter, IBM has raised its guidance for the revenue consulting the tech giant will bring. “We now expect a pre-tax margin of around 10%, up a few points year-over-year,” Kavanaugh said. “This reflects improved performance in the second half as we realize price increases in our contracts.”

The company’s investments in 2021 in employee ecosystem skills, capabilities and partnerships were in preparation for strong demand for consulting services in 2022, he said.

“Consulting, as I’ve always said, is the tip of the spear that provides tremendous value in leveraging IBM technology and driving scale and adoption of our hybrid cloud platform – then you couple that with the inflationary environment, you see the pressure on our gross margins,” Kavanaugh said.

He continued, “When we saw this robust demand environment, we invested a significant amount of capacity and capacity. In the first innings of this, you have underutilization. We knew it. This is why we had to tackle our G&A structure to optimize and rationalize it. By the way, reinventing IBM through automation, digitization – everything our customers do – we did at IBM. This mitigated the overall impact on earnings.

The value of a change in IBM Consulting prices will take a few quarters to show up, Kavanaugh said.

The consultancy reported $4.8 billion in revenue for the quarter, up 17% year-over-year with bookings up 40%, according to IBM. Consulting’s hybrid cloud revenue reached $8.3 billion in the past 12 months, growing 32% and representing 45% of consulting business.

The consulting segment nearly doubled its Red Hat-related signings year over year. Kavanaugh said the Red Hat practice has nearly $4.5 billion in business volume since its inception to date. The consulting segment also generates between 20 and 40 percent of Cloud Pak revenue for IBM.

IBM grew revenue through strategic “double-digit” partnerships, with Salesforce, SAP, Amazon Web Services and Microsoft Azure leading the growth.

Business transformation, the largest category within IBM Consulting, brought in $2.3 billion in the quarter, up 19% year-over-year. Enforcement operations brought in $1.6 billion, up 14%. And technology consulting brought in $1 billion, a growth of 19%.

Infrastructure

IBM’s infrastructure revenue was about the same, at $3.2 billion. Hybrid infrastructure brought in $1.7 billion of that revenue, down 2% year-over-year.

Distributed infrastructure grew 8% year-over-year, fueled by customer demand for data-intensive workloads S/4HANA, SAP’s ERP offering, on high-end IBM systems Power10. zSystems fell 18% year over year.

IBM is in its 11th quarter of z15 availability. Kavanaugh said IBM shipped more z15 million instructions per second (MIPS) than “in any other program.”

“Our installed MIPS capacity is now up more than 45% over previous programs,” Kavanaugh said. “We have about 80 million MIPS that are out there today. This is our opportunity to deliver tremendous value to our customers, but also to monetize that value in a variety of ways.

Earlier this month, IBM announced the z16 mainframe platform designed for cloud-native development, cybersecurity resiliency and with an on-chip AI accelerator, Krishna said.

“The z16 exemplifies our ability to bring critical innovations to a platform that remains essential to the global economy,” he said.

The release of the z16 at the end of the second quarter should mean better performance than IBM’s infrastructure model for the year, plus about 5 percentage points of sales to Kyndryl.

Kavanaugh also said IBM expects no supply chain disruptions to ship the z16s.

“Our working capital was actually a use of cash in the first quarter as we cautiously built up our fair inventory position given the ongoing supply chain disruption in the market,” he said. declared. “We have secured our supply for the planned z16.”

Kyndryl

Kyndryl, the recent publicly traded independent spin-off, formerly known as IBM’s managed infrastructure business, contributed about 50% to IBM’s growth in the quarter.

Overall, IBM posted 11% growth in the quarter and $14.2 billion in revenue. About 5 percentage points of the growth came from additional sales to Kyndryl.

Additional sales to Kyndryl contributed 8 percentage points to software revenue growth of 15% in the quarter. Software generated $5.8 billion in revenue.

Kyndryl contributed approximately 28 percentage points to transaction processing revenue growth, which saw revenue growth of 31% year-over-year.

And Kyndryl contributed about 1.5 points to the 10% year-over-year hybrid platform and solutions growth.

“So by growing IBM both with additional Kyndryl sales and with our broader customer base on the back end of a mainframe product cycle, we’re quite happy with the operational leverage we’re seeing in our business,” Kavanaugh said.

IBM shares were trading at around $131 after hours on Tuesday, up about 4% from the opening price of $125.75 a share.

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