IBM CFO: ‘We're Off To A Great Start’ With Red Hat

Despite an acceleration of the open source software leader’s business in its first quarter post merger, Big Blue's revenue slump continued for the fifth straight quarter.


IBM's revenue slump continued into its fifth consecutive quarter, but recently acquired Red Hat provided a bright spot for Big Blue to highlight in its Q3 earnings call Wednesday in both revenue and roadmap.

Much of IBM CFO Jim Kavanaugh's focus during the presentation to investors was on the open source software leader in the first disclosure incorporating Red Hat's financials following the $34 billion mega-deal.

"We're off to a great start," Kavanaugh said of the union. "Ninety days into this, we've very pleased."

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IBM is focused on winning "chapter two" of hybrid cloud, which will be driven by migrations of mission-critical workloads, Kavanaugh said.

IBM sees Red Hat as giving it a leg up in the hybrid and multi-cloud world that has emerged through its strong positions in the Linux and Kubernetes markets.

Red Hat Enterprise Linux, as the dominant enterprise OS, and OpenShift, the "leading hybrid cloud platform," are at the center of IBM's hybrid cloud strategy, he said.

As the merger progresses, IBM is adapting its existing business to take advantage of those synergies. The company has modernized its entire software portfolio by containerizing middleware and applications to run on all private and public clouds, integrated OpenShift onto IBM Cloud and IBM Z Systems, and introduced consulting and management services for Red Hat technologies, Kavanaugh told investors.

Red Hat saw 20 percent growth in the third quarter on $371 million in revenue—an acceleration of that business, which grew roughly 15 percent in its final independent quarter.

And the IBM Cloud Paks, the first joint IBM-Red Hat product, "are off to a nice start," Kavanaugh said of the recently released containerized versions of popular middleware on top of OpenShift.

IBM's overall cloud and cognitive business, which incorporates Red Hat, grew more than six percent, reflecting success in the company's investment to capture hybrid cloud market share, he said.

The Global Business Services consulting practice for application and process services saw revenue of $4.1 billion, edging up 1 percent.

But cloud couldn't make up for steep declines in Global Technology Services, the infrastructure cloud services practice, and IBM's hardware systems business.

Overall revenue of $18.03 was down almost 4 percent without adjusting for currency headwinds, and fell short of the $18.22 billion expected.

Earnings-per-share of $2.68 also fell a penny short of predictions, and IBM stock tumbled after hours, from a market close on Wednesday of $142.11 to $134.89 at the time of this publication