IBM misses on revenues but foresees rapid growth from HashiCorp purchase – Business
As the first major information technology provider to report earnings in most quarters, IBM Corp. results are often seen as a bellwether for the industry’s health. However, securities analysts may need to go back to their spreadsheets following Big Blue’s announcement today of a revenue miss after three straight quarters of beating expectations.
First-quarter earnings of $1.68 per share were eight cents better than analysts’ consensus expectations of $1.60. Revenues rose 1.5%, to $14.46 billion, below the $14.53 billion consensus.
IBM blamed the revenue miss on various factors, including continued high interest rates, currency exchange fluctuations and customer caution. “We saw lengthening in the backlog duration driven by large-scale digital transformations and a reduced scale of revenue realization as clients tighten the discretionary spending,” said Chief Financial Officer James Kavanaugh. The sale of The Weather Co. to Francisco Partners Management L.P. also closed earlier than expected, triggering charges that hurt quarterly revenue.
The company reaffirmed its revenue estimates for the second quarter and full fiscal year but at the low end of its previous guidance. Currency exchange pressures knocked revenue back about 1% this quarter and will continue to reduce sales by 1.5% to 2% in the next quarter, “which is about a half-point worse than we expected 90 days ago,” Kavanaugh said.
Investors, perhaps accustomed to IBM’s recent drumbeat of good news, hammered shares in after-hours trading, sending them down 8%. Charles King, chief analyst at Pund-IT Inc., said the decline may signal a turn in investor sentiment. “Given the narrowness of the miss, I expect the after-hours selloff signals general pessimism on upcoming quarters,” he said.
Officials chose not to focus on the weak revenue growth, however, preferring to talk about the synergies it expects from the $6.4 billion acquisition of infrastructure automation firm HashiCorp Inc. announced earlier today and the $1 billion in total revenue it realized from generative artificial intelligence offerings in the quarter.
Hybrid cloud synergies
IBM expects HashiCorp to strengthen its hybrid cloud story and drive growth in strategic areas such as Red Hat, watsonx, cybersecurity, IT automation and consulting. HashiCorp has more than 4,400 enterprise customers and 85% of the Fortune 500 use its developer-focused offerings. The company previously sold its products under an open-source license, but last year, it shifted to “source available,” which restricts open-source use to noncommercial purposes.
Kavanaugh said he expects the transaction to be accretive to adjusted earnings before interest, taxes, depreciation and amortization during the first full year and to yield positive cash flow a year after that. Free cash flow is one of the two critical financial metrics IBM emphasizes, along with revenue.
The CFO said there are big opportunities in international sales. “Only about 20% of the Forbes Global 2000 are HashiCorp customers, and just one-quarter of its customers results in $100,000 in annual recurring revenue,” he said. “We have an opportunity to monetize and upsell their products. It will drive a higher growth profile over time.”
“HashiCorp is an accelerant for IBM strategy in terms of giving us a better overall portfolio so more clients want to do business with us,” said Chief Executive Arvind Krishna.
Stronger hand
Nucleus Research Inc. CEO Ian Campbell agreed that the purchase would strengthen IBM’s multicloud hand. “HashiCorp adds to the company’s cloud capabilities and AI focus,” he said. “These are strong segments of the tech market.”
Pund-IT’s King agreed. “The companies’ approaches to cloud and IT management are well-aligned, and the deal should work well for them both,” he said.
On a segment basis, Hybrid Platform and Solutions sales were up 7% in constant currency, Red Hat rose 9%, automation grew 13%, Data and AI advanced 1%, and Security was down 3%.
Transaction Processing grew 4% and the Infrastructure segment inched up 0.2%, led by 5% growth in the z16 series of mainframes, a product line that shows remarkable resilience eight quarters into its lifecycle. “This product cycle continues to resonate with clients and perhaps surpass the z15’s performance,” Kavanaugh said. “It is uniquely designed for AI with the first on-chip AI inferencing and remains an enduring platform, driving not just hardware adoption but also software, storage and services.”
IBM’s Consulting segment revenue grew 1.7% in constant currency terms, with business transformation and technology consulting both advancing 3%. Executives said they are bullish on the consulting business, which is currently on a $13.9 billion annual run rate.
“We continue to see strong demand for digital transformation and consulting projects, although we are seeing some pressure on smaller or discretionary projects,” Kavanaugh said. “We now see mid-single-digit revenue growth in consulting, accelerating throughout the year.”