'IBM is now a very different company' says CEO as Q1 2022 beats expectations

Months after spinning out infrastructure service division, IBM not bigger but feeling less blue

Freed from the financial anchor that was its infrastructure services division - spun out as Kyndryl in November - IBM kicked off calendar Q1 of 2022 with something that has eluded it for years: decent growth.

Big Blue has undergone some changes as it adapts to modern computing in the cloud, and CEO Arvind Krishna said trading output this quarter reflects its actions - i.e lopping off a division that dragged down IBM's top line and sometimes ate into the operating profits of other divisions.

"We have strengthened our portfolio, we are leveraging our ecosystem, and we are streamlining our business. While I acknowledge there is always more to do, we are pleased with the start to the year," Krishna said on IBM's earnings call.

IBM claimed it continues to see demand for both technology and consulting from its clients responding to strategic challenges and opportunities, such as competing for talent, supply chain issues, inflation, cybersecurity or geopolitical instability.

"Our new client engagement model based on experiential selling, client engineering, and co-creation is strongly resonating among clients," he said. "Over the last few quarters, sales productivity is rising, renewal rates are increasing, and recurring revenue is growing."

Krishna also said that IT automation is a huge opportunity for Big Blue, saying that the firm was "bullish" on the immense potential that it represents.

"We firmly believe that our AIOps capabilities are poised to seize this significant opportunity. In the last quarter, we announced a new AIOps solution in collaboration with Flexera that is designed to automate software license compliance."

IBM's revenue for Q1 2022 was up 8 percent year-on-year to $14.2 billion, beating analyst estimates, despite taking a $300 million hit to revenues from suspending all business in Russia due to hostilities in Ukraine.

This was attributed by IBM to double-digit growth in its software and consulting businesses, driven by increasing hybrid cloud adoption from organisations.

Software revenue was up 15 percent to $5.8 billion and Consulting was up 17 percent to $4.8 billion during the quarter. CFO and senior vice president Jim Kavanaugh, said:

"As we have discussed in the past, these are our two growth vectors and together represent over 70 percent of our annual revenue. Infrastructure performance, which is influenced by product cycles, was flat as compared to last year," Kavanaugh said.

IBM's mainframe business tends to perform strongly following the release of a new model, but revenue can then tail off as the product cycle progresses. zSystems revenue was down 19 percent in Q1, with Kavanaugh pointing out: "We are now in the 11th quarter of z15 availability." Its successor, the z16, was launched at the beginning of April, and will likely provide a revenue boost in subsequent quarters.

Breaking down IBM's Software revenues, Red Hat grew 18 percent and Transaction Processing was up 26 percent.

Within the $4.8 billion Consulting unit, Hybrid Cloud was up 24 percent, Business Transformation up 15 percent, Technology Consulting up 14 percent, and Application Operations up 10 percent.

Infrastructure revenue for the quarter was $3.2b, down 2.3 percent: Hybrid Infrastructure was down 5 percent, the aforementioned IBM z Systems fell, Distributed Infrastructure up 5 percent, Infrastructure Support flat, and the hybrid cloud part of Infrastructure down 20 percent.

Kavanaugh claimed that IBM's new business approach focused on a platform-centric, hybrid cloud, and AI strategy was paying off. "Ninety days ago, we expected to grow revenue at a mid single-digit rate at constant currency before the incremental Kyndryl sales. With the strong start to the year, we now see revenue growth at the high end of that mid single-digit range."

So it appears that the very painful steps IBM took to improve its fortunes in the shifting world of modern computing are working to a fashion.

"IBM is now a very different company," said Krishna. "We have in effect changed our company's trajectory and while much remains to be done, we are beginning to reap the rewards of our hard earned efforts and we are confident in our trajectory for the year."

Profit from continuing operations grew to $662m from $403m. ®

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