IBM’s New Hat Doesn’t Cover Old Problems

IBM says its Red Hat unit generated $987 million in revenue for the latest quarter on a normalized basis.

If nothing else, the folks at Red Hat will probably never feel unloved by their new adoptive parent.
IBM -5.52%

bought the software maker for an eye-popping $33 billion a year ago. It is the largest M&A deal the 108-year-old tech giant has ever undertaken and represents a major gambit by the company to reshape its fortunes in a corporate technology world that is undergoing a shift to the cloud. IBM completed the deal in early July, making its third-quarter results reported Wednesday afternoon the first to incorporate Red Hat.

The newly acquired company turned out to be the bright spot in those results. IBM says its Red Hat unit generated $987 million in revenue for the period on a normalized basis, which would represent 19% growth for the business from a year earlier. That is a better growth rate than Red Hat saw on its own in its last four reported quarters.

IBM’s executives aren’t short of enthusiasm on the business: Red Hat was mentioned more than 50 times by IBM financial chief

Jim Kavanaugh

on the company’s earnings call Wednesday afternoon.

But the results also showed—rather sharply—that there is only so much Red Hat can do.

IBM’s overall revenue still slipped by 4% to $18.03 billion in the quarter, coming in below Wall Street’s estimates and led mainly by the slowdown in global technology services, the company’s largest business unit.

It was also the lowest quarterly revenue IBM has reported in 21 years, according to data from S&P Global Market Intelligence IBM’s stock had been a relatively strong performer this year, in part due to expectations of what Red Hat might help the company achieve. The stock was up 25% so far this year ahead of the report, but fell 5.5% Thursday.

IBM still believes it can rejuvenate growth next year, with Red Hat expected to play a major part in that. But even in an optimistic scenario where Red Hat’s revenue growth accelerates to around 20% annually compared with 15% in its most recent fiscal year, its 2020 revenue would still only amount to about 6% of IBM’s total, based on Wall Street’s current estimates.

So Big Blue needs plenty of other things to start going right as well. And soon.

Write to Dan Gallagher at [email protected]

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