(Bloomberg) – International Business Machines Corp. Shares slipped after executives were tight-lipped about the company's $ 34 billion Red Hat acquisition and how it will help growth in cloud computing
The deal closed last week and IBM reported quarterly results on Wednesday. Analysts tuned into a conference call to glean fresh details on the impact of adding Red Hat's open-source software to IBM's current offerings. But Chief Financial Officer Jim Kavanaugh declined to answer any questions on Red Hat, saying the company will share an updated financial forecast at its annual investor briefing on Aug. 2.
"Everyone is looking forward to this investor update," said Logan Purk, an analyst at Logan Purk, "It's paramount that IBM really nails that."
Second-quarter revenue fell 4.2 percent to $ 19.2 billion, slightly beatting the average analyst estimated. It was the fourth consecutive quarter of revenue declines for the Armonk, New York-based company.
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. Chief Executive Officer Ginni Rometty paid a rich premium for Red Hat to help the 108-year-old company catch up with cloud market leaders Amazon.com Inc. and Microsoft Corp. The deal was officially closed last week, with Red Hat's contribution not yet reported in IBM's quarterly financial reports.
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% 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
This quarter's results are significant because they represent the last clean read of IBM's trajectory before the integration of Red Hat, Sanford C. Bernstein analysts Toni Sacconaghi and Corry Wang wrote in a note before the results were released
Revenues in the global technology service unit, which includes cloud infrastructure and technology support, were $ 6.8 billion, down 6.7%, from a year ago. The division shrank the same amount in the previous quarter
The drop was the result of IBM ending some unprofitable businesses, Kavanaugh said. "We will see improvements in these numbers as we get into the second half," he added. Technology Services is the largest business unit of IBM, with almost 40% of total sales.
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.
Big Blue has reported a shrinking revenue growth since 2012. There was a modest and temporary decline in early 2018, but the slight uptick in sales stemmed from its legacy mainframe computers rather than newer technologies such as artificial intelligence and cloud computing. In the second quarter, IBM reported revenue growth of 3.2% in cloud and cognitive solutions, stronger than in the previous quarter
IBM's lackluster sales are due to the cannibalization of its legacy technology and data centers, Wedbush Securities Inc. analyst Moshe Katri said in an interview before the results were released. While the company has made significant strides towards new technologies such as cloud computing, these services are capital and labor light, Katri said. "The future of IBM is a hybrid cloud," said Ian Campbell, CEO of Nucleus Research. "It's time to grow that business and make it really count for overall top-line growth," he said. "But the biggest challenge is they are very late to the cloud party," he said. Amazon Web Services and Microsoft Azure have dominated the public cloud space for years and IBM, once a tech titan, is considered small-fry in comparison. "IBM's Cloud is the make or break for IBM, but nobody knows they are there," said Campbell.
On Tuesday, IBM announced that AT & T Inc. will be shifting its internal software applications to the IBM cloud in a multi- "But it feels like two B-list celebrities announcing an engagement in hopes of becoming an A-lister," he added. "This is not going to move the needle . "
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