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IBM ‘A Different Company’ Post-Kyndryl, With Bets On Red Hat, Automation, Consulting

IBM reports $16.7 billion in revenue for the quarter, up 6.5 percent year over year.

In IBM’s first quarterly earnings report since the spin-out of its managed infrastructure business, the company highlighted Red Hat, investments in automation and its growing ecosystem of partners as factors that helped grow revenue 6.5 percent year over year for the quarter that ended Dec. 31.

IBM CEO Arvind Krishna told analysts on the quarterly earnings call Monday not to expect any more divestitures in the near future the size of the Kyndryl spin-out – for which IBM is still on the hook for $500 million in costs.

“We have the correct portfolio to be able to grow where our clients have got demand and where the market has demand,” Krishna said. “We are now approximately a 30 percent consulting company, a 70 percent technology company. It‘s about a little bit under half in software.”

[RELATED: IBM Expands Environmental Sustainability Software Portfolio With Envizi Acquisition]

Although IBM didn’t break out exact figures, company executives said that subsidiary Red Hat – known for its containerization software platform OpenShift and its automation platform Ansible – grew 19 percent year over year.

IBM now has more than 3,800 hybrid cloud platform clients, up 1,000 clients year over year, according to the company. IBM Consulting helped land about 700 Red Hat engagements during the year, according to the company.

Red Hat signings more than doubled this year, now more than $4 billion since inception, according to the company. The 150 client inceptions during the quarter bring the total since inception to more than 1,000.

Automation – including AIOps, application servers, integration and business automation – grew 13 percent.

And the company saw 50 percent revenue growth during 2021 in partnerships with Amazon Web Services, Microsoft Azure and Salesforce. For every $1 of hybrid platform revenue, ecosystem partners generate $3 to $5 of software, $6 to $8 of services and $1 to $2 of infrastructure revenues, according to the company.

“We‘ve been taking actions that position our business to address the attractive hybrid cloud and AI opportunity,” Krishna said. “Our fourth quarter results and expectations for 2022 are a first glimpse of today’s IBM and to reinforce our confidence in our strategy and our model.”

Krishna did hint at more acquisitions to come for IBM, describing $20 billion of “flexibility” available to the company over the next three years.

The company spent about $3 billion on 15 acquisitions in 2021 and announced its first acquisition of the year earlier this month with Envizi, a developer of data management and analytics software for evaluating environmental performance.

IBM Chief Financial Officer Jim Kavanaugh said that IBM’s investments make it “a different company” following the spin off.

“We‘ve aligned our business to a more platform centric business model,” Kavanaugh said on the call. “And we’re simplifying and redesigning our go-to-market to better meet client needs and execute on our growth agenda. Bottom line, we‘re exiting 2021 a different company. We have a higher growth, higher value business mix, with over 70 percent of our revenue in software and services, and a significant recurring revenue base dominated by software.”

Watson Health Sale

IBM executives didn’t have much to add about the announced pending sale of IBM Watson Health health care data and analytics assets to Francisco Partners.

The assets include Health Insights, MarketScan, Clinical Development, Social Program Management, Micromedex and imaging software, according to a statement.

Financial terms were not disclosed. The transaction should close next quarter. “At that point in time, we will disclose information around Watson Health and what the implications are to our guidance overall and we‘ll update investors as we always do,” Kavanaugh said on the earnings call.

Invest In Cybersecurity 

Although Red Hat and automation saw growth during the quarter, IBM executives promised better performance from security in the future, which saw a decrease of 2 percent in revenue year over year.

Kavanaugh highlighted a new data security offering, Guardium Insights, and the recently acquired endpoint threat services company ReaQta.

The company’s investments in a platform model should not only help with cybersecurity offerings, but its should expand success throughout IBM’s cloud products suite and its partner ecosystem, Krishna said.

Customers “are looking for a partner they can trust and who has a proven track record in bringing about strategic transformation projects,” Krishna said. “This is why our strategy is focused on helping our clients leverage the power of hybrid cloud and AI. Hybrid cloud is about providing a platform that can straddle multiple public clouds, private clouds and as-a-service properties that our clients typically have. Our approach is platform centric, and the platform we have built is open, secure and flexible. And it provides a solid base for the multiplier effect across software and services for IBM and our ecosystem partners.”

Quarterly Performance, 2022 Expectations

IBM reported $16.7 billion in revenue for the quarter, up 6.5 percent year over year.

Software revenue was $7.3 billion for the quarter, up 8 percent year over year. Software saw more than $13 billion in annual recurring revenue, an 8 percent increase year over year. This segment includes Red Hat, automation and security.

Transaction processing grew 11 percent year over year and the software segment hybrid cloud revenue grew 22 percent. Kavanaugh said that all of the transaction processing growth came from IBM’s commercial relationship with spin off Kyndryl.

IBM’s consulting revenue for the quarter was $4.7 billion, up 13.1 percent. The consulting segment hybrid cloud revenue grew 31 percent. Business transformation consulting grew 18 percent. Technology consulting grew 14 percent. Application operations grew 6 percent.

Infrastructure brought in $4.4 billion in revenue for the quarter, flat year over year. Offsetting the 5 percent growth in distributed infrastructure was a 12 percent decrease in infrastructure segment hybrid cloud revenue, a 6 percent decrease in IBM Z and a 1 percent decrease in infrastructure support.

Hybrid cloud revenue grew $6.2 billion in the fourth quarter, up 16 percent year over year.

In 2022, the company expects to grow revenue around 5 percent before adding in contributions from Kyndryl. Kyndryl will contribute an additional three points of growth across the first three quarters of the year. IBM expects free cash flow of $10 billion to $10.5 billion in 2022, according to the company.

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