IBM reported revenue for Q3 2021 — and the news wasn't just "good." For a company that has seen negative or low revenue growth for almost a decade, it was great. Big Blue reported $16.7 billion in revenue for the quarter, up 6.5% year over year (8.6% on a constant-currency basis; the strengthening dollar is making a number of companies deal with FX fluctuations).
The solid results come a quarter after IBM posted far more modest 0.3% growth in the third quarter of 2021, on slightly higher $17.6 billion. The good news also comes in the wake of the company spinning out its $19 billion infrastructure services business. It may seem slightly counterintuitive to see a company lose a large chunk of business and have it work out in its favor so quickly, but that would appear to have been a big part of CEO Arvind Krishna's thinking in making that move to focus almost entirely on the cloud.
We watched the company flounder for years, at one point recording 22 straight quarters of negative revenue growth. When former CEO Ginni Rometty left in 2019 and was replaced by Krishna, he made it clear there were changes coming and he was going to cut the parts of the business that were not part of his vision.
That included kicking Kyndryl to the curb and selling the bulk of the company's Watson Health division, an area where Rometty had made a big bet and spent billions to build it into a substantial business. When it didn't work out, Krishna was not afraid to cut his losses, selling off the assets on Friday to Francisco Partners in a deal that was far below the money Rometty had plowed into the division, with reports putting the deal at around $1 billion.
Red Hat CEO looks to maintain double-digit growth in second year at helm
Krishna has made it clear he wants to build the company around Red Hat now, the company IBM bought in 2018 for $34 billion. Hybrid cloud revenue, the division where Red Hat lives, reported $6.2 billion in revenue for the quarter — up 18% year over year, giving the company the kind of growing revenue it was hoping for.
The CEO has made it known he's looking for steady growth moving forward, not eye-popping, but the kind of steady growth you would expect from a mature company like IBM, and certainly not quarter after quarter of negative growth. This would appear to put them on that road.
That's three straight quarters of positive growth for fiscal 2021 — 3%, 0.3% and 6.5% — and while those are not the type of growth numbers that make you scream from the rooftops, they are a positive trend for a venerable corporation that desperately needs it
Patrick Moorhead, founder and principal analyst at Moor Insight & Strategies, says the report is at the very least a good sign for the company. "While one good quarter doesn't make a trend, I believe three do and at a minimum, I believe we will see mid-single-digit growth in the near future."
Other bright spots
While hybrid cloud revenue growth was the obvious outlier result from the company’s matrix of Q4 outcomes, there were other bright spots worth considering. Software revenues were up 8% (10%, constant currency), and consulting-derived top line was up a strong 13% (16%, constant currency).
The result of the generally positive results was a strong profit outcome. IBM reported gross profit of $9.5 billion, up a slim 2.5%. However, that figure converted into $2.9 billion in net income at Big Blue, up a shocking 183% on a pre-tax basis. The company’s profit, after taxes, still came to a strong $2.5 billion, up a slightly more modest 107% compared to the year-ago quarter.
In simple terms, IBM’s business remains a very lucrative one. And one that, finally, after years and years of stagnation and decline from a volume (revenue) basis, has not only managed a string of growth, but, in its most recent quarter, pretty solid top line expansion, to boot.
IBM did not survive this long by accident, so perhaps we should have had more faith. But its epic run of negative growth did engender a pretty strong cadre of doubters. Investors are impressed, at least, with IBM shares up sharply in after-hours trading.
Now let’s see if the company can repeat the feat this year. Then we can really call it a comeback.