IBM is set to spin off its legacy IT managed infrastructure business in less than two weeks to allow it to focus more on cloud, software, AI and other emerging technology segments. But in the third quarter, revenue from these segments failed to meet analyst expectations.
For the quarter, IBM reported overall revenue of $17.6 billion, which was up slightly from $17.5 billion in the third quarter 2020, but under consensus expectations of $17.7 billion. Meanwhile, revenue in IBM’s Cloud & Cognitive Software segment came in at just under $5.7 billion, but analysts were expecting closer to $5.8 billion.
Overall net income for the most recent quarter was $1.1 billion, about $2.52 per share, which was lower than the $1.7 billion reported for the same quarter last year, but did hit meet analysts’ forecasts.
During the company’s third quarter earnings call, IBM leaders downplayed the effect that the Kyndryl legacy business spin-off and related changes on how IBM will report future revenue are having on the company’s performance. James Kavanaugh, senior vice president and CFO, said during the call that IBM’s Global Business Services revenue, which along with cloud software will represent more than 70% of the company’s revenue profile after the spin-off, was up 11% during the third quarter to more than $4.4 billion.
“Across our segments, IBM’s cloud revenue was up 11% over the last year,” he said. “And it’s up 17% excluding the cloud revenue going to Kyndryl. This is led by Global Business Services and Cloud & Cognitive Software, which are up 27% and 28% respectively over that period.”
The Kyndryl spin-off is due to take effect Nov. 3, prompting Kavanaugh to add that the current quarter is “a major milestone as we transition to the future IBM.”
Later in the earnings call, IBM CEO Arvind Krishna took issue with an analyst’s question about the possibility of a “near-term disruption” in IBM’s business from the Kyndryl spin-off. “I think there’s a slight pause, and it’ll be the end of third quarter, maybe the beginning of fourth quarter,” Krishna said. “I am completely confident that this will be well behind us by the beginning of 2022.”
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Meanwhile, Red Hat continued to be a positive contributor to IBM’s bottom line during the third quarter, with revenue up 17% year over year. “Red Hat revenue growth was driven by double-digit growth in both infrastructure and application development and emerging technology,” Kavanaugh said. “And we had more than 40% growth in OpenShift recurring revenue.”
He added, “We recently shared plans to provide new software revenue categories starting in the fourth quarter. We will combine our two software growth vectors, Cloud and Data Platforms and Cognitive Applications, and within that, provide greater transparency into performance and trends by business area. Looking across these growth vectors, Red Hat, Security and Automation fueled revenue growth this [third] quarter… Our annual recurring revenue, or ARR, across these software growth vectors grew 7%. This is a good indication of the progress in our hybrid cloud and AI client adoption.”
Kavanaugh also said IBM is continuing to increase go-to-market resources around Red Hat and related ecosystem partnerships with AWS and Microsoft.