'Patience is wearing thin' as IBM reports yet another quarter of falling revenues, but its $34 billion Red Hat buy is a bright spot (IBM)


Ginny Rometty

  • IBM shares fell late Wednesday after the company reported weaker-than-expected revenue for the third quarter. IBM also reported another decline in revenue.
  • But IBM said its Red Hat acquisition is paying off, saying the software giant IBM bought for $34 billion posted a 20% gain in revenue.
  • That’s a good sign, one analyst told Business Insider. But another analyst said “patience is wearing thin” as IBM revenue continues to slide.
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IBM’s stock fell sharply late Wednesday after the company reported another drop in quarterly revenue.

IBM shares were down more than 5% at $134.38 as the tech giant missed Wall Street’s revenue expectations. But IBM also pointed to signs that its $34 billion Red Hat acquisition is starting to pay off, as revenue for the open source cloud software maker rose 20% year-over-year — though it didn’t give a specific figure.

“IBM and Red Hat are off to a great start,” IBM Chief Financial Officer Jim Kavanaugh told analysts on the company’s earnings call. “The actions we’ve taken are resonating with our clients.”

IBM’s Red Hat purchase, which closed earlier this year, was supposed to boost Big Blue’s bid to establish a stronger presence in the cloud, which has allowed businesses to set up and maintain networks in web-based platforms, making it possible to downsize or abandon private data centers. That market is dominated by Amazon, Microsoft and Google. 

IBM is taking aim at the hybrid cloud, in which businesses maintain networks on cloud platforms, while keeping huge chunks of their data and applications on private data centers. IBM sees that market growing to become a $1 trillion opportunity, one that it says it will dominate.

Analyst Roger Kay of Endpoint Technologies Associates said the Red Hat results were upbeat for IBM.

“Sales were up at Red Hat, even with whatever uncertainties were hanging over the company during the closing period,” he told Business Insider.  “That can only be a good sign. I would expect the merged companies to gain more synergy with time. There’s a reason that IBM bet a record-breaking amount on the deal.”

But Ian Campbell, CEO of Nucleus Research, said the Red Hat purchase “and the focus on the cloud will take some time to pay off.”

“Still, patience is wearing thin,” Campbell told Business Insider as he pointed to IBM’s revenue miss.

IBM posted a profit of $1.67 billion, or $1.87 a share, compared to a profit of $2.69 billion, or $2.94 a share, for the year-ago period. Adjusted profit was $2.68 a share. Revenue fell to $18.03 billion from $18.80 billion. 

Analyst were expecting IBM to report adjusted earnings of $2.67 a share on revenue of $18.22 billion. IBM has seen its revenue shrink over the last few years, as demand for hardware and software for private data centers declined.

“This may be a record for down quarters in a corporation without a change in leadership,” he added. “If there’s a rabbit in the IBM hat, it’s very tired and hungry, time to let it out. Although cloud revenue was up, the rest of the IBM picture was cloudy.  There needs to be a turnaround across all business units before IBM is a key player again.”

Got a tip about IBM or another tech company? Contact this reporter via email at bpimentel@businessinsider.com, message him on Twitter @benpimentel. You can also contact Business Insider securely via SecureDrop.

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