IBM Systems sales sag as revenue growth slows to a crawl – but at least tape did OK

Big Blue promises mid-single-digit growth is coming, but CEO struggles to explain how.

IBM has blamed another quarter of tepid performance on its servers.

Big Blue's last quarter before it spins out services limb Kyndryl saw it land revenue of $17.6 billion – just 0.3 per cent above revenue for the same quarter in 2020. For the year to date, which now covers three quarters, the corporation has posted anaemic 1.6 per cent growth.

Investors were told that the quarterly growth figure is 2.5 per cent if you consider Kyndryl's imminent ejection, or 1.9 per cent after adjusting for divested businesses and currency.

Whatever number you choose, CEO Arvind Krishna described growth as "modest" and reiterated that IBM plans "sustainable mid-single-digit revenue growth starting in 2022".

On the earnings call, financial analysts asked unusually pointed questions about whether or not the one-time behemoth can deliver.

Bernstein analyst Toni Sacconaghi offered his own take on IBM's numbers. In his view the company went backwards – an assertion Krishna did not dispute. He then challenged the CEO's growth plans, arguing that IBM needs to grow faster than predicted to meet the mid-single-digit target.

Krishna suggested that improved software sales, future acquisitions, and tweaked sales incentives should do the trick.

One IBM acquisition – Red Hat – is doing rather well with revenue up 17 per cent. Red Hat has also made a $3.5 billion contribution to the firm's Global Business Services unit (soon to be renamed "IBM Consulting") which grew revenue by 11 per cent. Recurring revenue derived from Red Hat's container management platform OpenShift rose by over 40 per cent, suggesting Big Blue is making ground as organisations adopt Kubernetes.

Hardware had a rough quarter, with revenue from the Systems unit down 12 per cent. Krishna argued that mainframes suffered because IBM's last refresh – the z15 – has been on sale for nine quarters, so orders are naturally tapering off. That made for a nasty Q3 number, but Krishna insisted that z15 has outperformed its predecessor.

Take that, mainframe-haters!

Power10, meanwhile, is new to market so sales are yet to surge – in part because IBM only has high-end boxes to sell. Power10-based products for smaller buyers will arrive in 2022 and hopefully kick things along.

Storage was a rare bright spot, with 11 per cent growth driven by driven what IBM described as “demand from hyperscalers for our tape products and growth in entry-level all-flash storage following our product refresh earlier this year".

Take that, tape-haters!

Krishna also had some happier news in the form of strong subscription growth for software, with Cloud and Data Platforms up nine per cent. Less happy news is that Cognitive applications revenue fell by one point and transaction processing platforms dropped a nasty nine per cent. A coming re-org will lump Cloud and Cognitive together, and probably make for a nicer number down the road a way.

Krishna would up the earnings call by asserting "we are on the threshold of the IBM of the future" and that we'll see that new shape in 2022. He also tempered expectations by saying 2023 will be the year in which IBM's "key growth" initiatives really start to bite.

"We'll also acknowledge that we always have more to do," he added, to the utter surprise of no-one. ®

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