IBM Profit Tops Estimates as Focus Turns to Red Hat for Growth

IBM Profit Tops Estimates as Focus Turns to Red Hat for Growth
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IBM reported earnings that topped analysts’ estimates in the fiscal second quarter as investors look to the Red Hat acquisition to fuel future growth in cloud computing, according to Bloomberg.

Earnings excluding some costs were $3.17 a share in the three months ending June 30, higher than the $3.08 average Wall Street estimate. For the full fiscal year, IBM stuck to a forecast of at least $13.90 a share. The shares jumped 2.7 percent in extended trading.

Revenue fell 4.2 percent to $19.2 billion in the quarter, slightly beating the average analyst estimate for $19.14 billion. It was the fourth consecutive quarter of revenue declines for the company. IBM reported revenue growth of 3.2% in cloud and cognitive solutions, stronger than in the previous quarter.

Analysts and investors will be tuning in to the conference call hoping to glean any details on the impact of IBM’s $34 billion acquisition of open-source software provider Red Hat. After lagging in the cloud market for more than a decade, IBM is pegging its future to a hybrid cloud strategy, that will allow it to offer services on both private and rival public clouds.

CEO Ginni Rometty paid a rich premium for Red Hat in order to help the 108-year-old company catch up with market leaders Amazon and Microsoft. The deal officially closed last week, so Red Hat’s contribution hasn’t shown up in IBM’s balance sheet yet. IBM said it will share further details at its annual investor briefing in early August.

Rometty has touted the Red Hat deal, which was announced in October, as a “game changer“ for IBM, claiming it will reset the entire cloud landscape. IBM has estimated only 20 percent of enterprise applications have made the shift to cloud so far and Rometty believes the company is in prime position to conquer the remaining market. By 2022, research firm Gartner Inc. predicts that about 75% of all databases will be migrated to a cloud platform.

Revenue in the global technology services unit, which includes cloud infrastructure and technology support, was $6.8 billion, down 6.7%, from a year earlier. The division shrank by the same amount in the previous quarter.

The drop is the result of IBM ending unprofitable third party businesses, CFO Jim Kavanaugh said. "We will see improvements of those numbers as we get into the second half." Technology services is IBM’s biggest business unit, pulling in almost 40% of total sales.