IBM earnings lag as it tries to capitalize on cloud

By Clare Duffy, CNN Business

New York (CNN Business)Growth in IBM’s cloud business appeared to be a bright spot in the company’s second quarter earnings, released after market close Wednesday. The cloud division was up 5% on $5.6 billion in revenue.

Overall, IBM (IBM) beat expectations on income, posting adjusted earnings per share of $3.17 compared to Wall Street’s projection of $3.07. The company reaffirmed its full-year guidance through the second quarter. Overall revenue was down 4.2% from the prior year to $19 billion, its fourth straight quarter of decline. IBM’s stock was down 1.7% in after-hours trading.

But while IBM’s cloud business was up, its growth pales in comparison to that of its competitors Microsoft Azure and Amazon Web Services (AWS).
Azure posted revenue growth of 73% in the quarter ending March 31, the third quarter of its fiscal year. And AWS grew more than 41% in the first quarter of 2019. Microsoft reports earnings Thursday and Amazon reports next week.

“Right now, it’s a two horse race (in cloud) with Microsoft and Amazon,” said Dan Ives, managing director of equity research with Wedbush Securities, adding that while one part of IBM’s business is focused on moving forward with cloud, “the other piece is more legacy and obviously it’s challenged given its maturity.”

Revenue from IBM’s global technology services business was down 4% for the quarter, and sales from its systems business fell 18%.
Ives said there is still significant growth opportunity for IBM cloud, especially with its acquisition of open source software company Red Hat that closed earlier this month.

“Given their enterprise presence, which is entrenched, there’s a low hanging fruit opportunity in cloud,” Ives said. Wedbush estimates that 30% of workloads are on the cloud, and that number will likely rise to 55% by 2022.
Ives said that to compete with those major players, IBM needs to continue investing in its cloud strategy with acquisitions like the $34 billion Red Hat merger and by going after more hybrid- and multicloud projects, a strategy businesses are increasingly employing as they move their data off physical servers.

That looks to be the company’s plan.
“With the completion of our acquisition of Red Hat, we will provide the only true open hybrid multicloud platform in the industry, strengthening our leadership position and uniquely helping clients succeed in chapter 2 of their digital reinventions,” CEO Ginni Rometty said in a release.
The company said it will discuss how it expects the Red Hat acquisition to contribute to its future revenue growth on August 2.