IBM’s blue Friday: As stock tumbles, what’s ahead in cloud, with NewCo, Red Hat?

RESEARCH TRIANGLE PARK – IBM shares have nosedived some 10% today following a mixed bag of earnings news on Thursday. While Raleigh-based Red Hat delivered growing revenues, its parent took hits in other areas. And Big Blue got a big black eye. So why? What happened?

Catie Merrill and Nicole Catchpole, analysts at Technology Business Research, read the earnings report, listened to the earnings conference call, and offer exclusive analysis for WRAL TechWire.

Here are some key points to consider as IBM (NYSE: IBM) moves to spin off a big chunk of its business and concentrates on the cloud:

The analysis:

The cloud

They are now growing C&DP [cloud and development platform] revenue on an organic basis so I think it’s clear they are benefitting from a PaaS [platform as a service] led approach. You continue to see success with the Cloud Paks in helping move clients to the cloud and driving subscription revenue versus the transactional legacy software which continues to experience headwinds during COVID-19.

Hybrid cloud

Big growth in hybrid cloud but the landscape is challenging – but its still early for IBM and Red Hat – as we see them scale with a platform approach, they’ll assert themselves in the space and sidestep direct competition with IaaS leaders like AWS.

Red Hat-GBS unit

Another note is that 1/3 of CloudPak revenue is from [business unit] GBS [Global Business Services] – this highlights how they are trying to unify Red Hat and GBS following the spin-off [of Global Technology Services]. I think we’ll continue to see the unification of Red Hat software and GBS to help clients look up the tech stack and drive value – less emphasis on infrastructure.

This is competitive given Red Hat’s software portfolio, which continues to develop (acquisition of StackRox) and we continue to see double-digit growth in the infrastructure business (RHEL) and the app development portfolio with OpenShift. That is a key benefit of the NewCo – driving these synergies between GBS and Red Hat.

The NewCo spinoff

Regarding NewCo – clearly still a lot of things to work out. Future investments will focus on Red Hat, specifically reskilling employees around that portfolio. The high value items will stay with IBM (security, edge, IoT), so that is another benefit. But as was mentioned managed infrastructure services is an integrated business, so we still see IBM having the capabilities to provide end-to-end services offerings, through the alliance with NewCo.

The leaner and more efficient operating model on both sides will help them capture the core demand for managed infrastructure and focus on what they each do best. NewCo as a strategic partner or customer of IBM will also be advantageous in an area that other targeted infrastructures won’t have.

Industry cloud

Another interesting takeaway is IBM’s focus on industry cloud – financial services and teleco. We see other cloud players (SAP comes to mind) doing this and it’s a trend that is resurging – they are in a good spot to position the CloudPaks to customers looking to migrate anyway – the immature cloud adopter is likely to go straight for a dedicated, customizable solution for specific verticals, according to our research.

The acquisition strategy

Sseveral buys under the new leadership. Kind of mirroring a similar approach to VMware who acquired several companies in 2019 and through this past year. IBM has the foundational workings in place through Red Hat so now looking to support that inorganically.

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