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IBM Q2 Sales Fueled By Red Hat, ‘Credibility’ Working With AWS, Microsoft

‘Who has the credibility to go across multiple public clouds?’ IBM CEO Arvind Krishna asked rhetorically on the call. ‘Microsoft and Amazon are our partners, not only our competitors. And that is an important play that IBM has done for many, many decades, where we integrate across environments that our clients operate in.’

Red Hat, Cloud Paks, Global Business Services and IBM’s “credibility” working with rivals Amazon Web Services and Microsoft were some of the drivers of IBM’s growth in the tech giant’s recent quarter.

Clients are choosing IBM’s hybrid cloud platform because it has the largest cloud vendors as partners, IBM CEO Arvind Krishna said in its earnings call with investors Monday.

“Who has the credibility to go across multiple public clouds?” Krishna asked rhetorically on the call. “Microsoft and Amazon are our partners, not only our competitors. And that is an important play that IBM has done for many, many decades, where we integrate across environments that our clients operate in.”

[RELATED: IBM CEO Krishna: Hybrid Cloud ‘Transformation’ Already Yielding Results]

IBM’s total cloud revenue during its second fiscal quarter was $7 billion, up 13 percent year over year. Red Hat revenue grew 20 percent year over year, according to IBM, which did not break out dollar amounts for its open-source software provider subsidiary.

IBM stock was up 3.68 percent to $143 in after-hours trading Monday.

“Our strategy around hybrid cloud and AI is resonating among our clients,” Krishna said. “Hybrid cloud is more than a strategy. It’s the reality for our clients today. They have multiple public clouds, private clouds, on-premises workloads and are dealing with stringent regulatory and security requirements. Our hybrid cloud platform gives clients the ability to flexibly deploy and manage data and applications across any environment.”

The strategy has also trickled down to positive results for IBM partners including New York-based LogicalisUS. Though most of Logicalis’ IBM business is in systems, Red Hat has helped with the partner’s automation and container offerings, Brandon Harris, vice president of modern data center at Logicalis, told CRN.

“The addition of Red Hat to the IBM portfolio continues to drive momentum in the automation and container space specifically, which are both enablers for a hybrid cloud solution for our IBM customers,” Harris said.

On Cloud Nine

IBM’s AI-powered Cloud Pak offerings, which are built on Red Hat OpenShift, gained momentum with enterprise clients during the quarter, IBM executives said on the call. Cloud Pak and hybrid cloud platform growth drove the $6.1 billion in second quarter sales for IBM’s cloud and cognitive software segment, an increase of 6.1 percent year over year.

Cognitive applications grew 12 percent year over year due to IBM’s security and AI applications.

The company also saw strong revenue from its Salesforce, SAP and Workday practices; app modernization and hybrid multi cloud management, CFO James Kavanaugh said. IBM saw not only revenue from the largest enterprises -- small deal signings grew at above 15 percent.

Global Business Services (GBS) revenue of $4.3 billion, up 11.6 percent year over year, marks a return to pre-pandemic levels, Kavanaugh said. The segment’s growth was driven in part by consulting, application management and global process services.

GBS is “an essential part of our hybrid cloud platform centric strategy,” Kavanaugh said.

“For every dollar that we land on the platform. we get $3 to $5 of software and $6 to $8 of services revenue, so we‘re going to invest significantly,” he said.

IBM’s Cloud for Financial Services reached a milestone of 100 ecosystem partners and landed Bank of America among its clients. “It makes it easier for banks to collaborate with ecosystem partners and vendors,” Krishna said.

Investing In Subscriptions And Consumption

The spin-off of IBM’s Global Technical Services division into a separate company called Kyndryl is still on target to complete by the end of the year, Kavanaugh said.

Once Kyndryl is spun off, IBM will be 45 to 50 percent software, helping the company’s bottom line, Kavanaugh said. With Red Hat’s subscription model, a more software-driven IBM will see an improved bottom line.

With the return of industries hit hard in the pandemic also comes client appetite for consumption-based purchasing models instead of perpetual licenses.

“We saw the revenue upside in ‘18 and ‘19,” Kavanaugh said. “In ‘20 and ‘21, you‘re going to continue to see the headwind as we’ve been saying. We expect that to come back in 2022 -- back to normal market trend growth rates overall.”

The company has also benefited from industries spending more on IT operations since last year, Kavanaugh told listeners. Even industries hit hard in the pandemic including travel and transportation are starting to spend more.

Spending On Research

While investing in short-term value for customers, Krishna hasn’t taken his eye off technology of the future, he told listeners. He believes quantum computing will “unlock hundreds of billions of dollars of value for our clients by the end of the decade,” he said.

“Quantum is an area of incredible promise,” he said.

AI is another technology IBM is putting research dollars into, he said. Some real-world use cases of IBM’s AI technology include an AI-powered assistant to help CVS Health with calls during the pandemic and virtual assistants used at Dallas Fort Worth airport and PayPal.

“We fundamentally believe that core to the competitiveness of every company going forward will be their ability to use AI to unlock real time value from the data wherever the data resides,” Krishna said. “Our efforts are focused on bringing our AI technologies to horizontal processes.”

Few Comments On Outgoing President

During the earnings call, Krishna dedicated little time to the upcoming departure of IBM President Jim Whitehurst, who will remain an adviser until a yet-to-be-disclosed date.

Krishna did provide some numbers on the two companies’ success since the acquisition. IBM now has 3,200 clients using the hybrid cloud platform, almost four times the number of clients before the Red Hat acquisition announcement, Krishna said. IBM’s Global Business Services segment has also garnered 700 Red Hat-based client engagements since the acquisition. Those 700 engagements have generated more than $2.5 billion of signings.

“Nearly three years since we announced the acquisition, there is no doubt this integration has been successful,” Krishna said.

Systems Less Sunny

Amid all the growth, IBM reported system sales of $1.7 billion, down 7.3 percent year over year, “reflecting product cycle dynamics across IBM Z, Power and Storage,” Kavanaugh told listeners. Part of the issue was a strong performance for the segment in the second fiscal quarter of 2020.

Still, some IBM partners continue to see sales growth in the tech giant’s systems business. IBM partner LogicalisUS finished “a very strong” IBM second quarter with demand continuing to build for IBM’s Power 10 platform, expected to launch in the fall and winter, said Harris, the Logicalis vice president.

“We are focused on helping customers migrate their IBM I and AIX workloads to cloud-based solutions like the Logicalis Power Cloud and the IBM Power VS platform,” Harris said.

For the second quarter, IBM saw $18.7 billion total in sales, a 3 percent increase year over year, according to the company.

IBM’s cloud and cognitive software segment saw a 6 percent increase year over year and the global business services grew 12 percent in the same time period.

And IBM saw total cloud sales of $27 billion over the last 12 months, up 15 percent.

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