IBM to acquire Hashi for $6.4B, hopes it will boost software biz and Red Hat

Investors want to know what Big Blue is smoking after growth disappoints

IBM has announced it will acquire Hashi for $6.4 billion, and touted the deal as meaning its hybrid cloud platform will emerge with a “comprehensive” set of products.

Big Blue CEO Arvind Krishna said enterprises are struggling to wrestle complex tech estates sprawling across multiple clouds, on-prem environments, and applications. Adding Hashi’s infrastructure management offerings to IBM’s existing Red Hat portfolio, he said, will mean the ancient IT company can help customers to cope.

And because this is 2024, Krishna added that Hashi will mean IBM can help customers add generative AI applications, too. He also thinks Hashi's security offerings are underappreciated, one reason the acquired company will sit within IBM's software business rather than becoming part of Red Hat.

In prepared remarks delivered on IBM’s Q1 2024 earnings call, CFO Jim Kavanaugh offered a little detail on how IBM plans to use Hashi’s wares, by suggesting “Red Hat’s Ansible Automation Platform’s configuration management and Terraform’s automation will simplify provisioning and configuration of applications across hybrid cloud environments.”

Kavanaugh pointed out that 70 percent of Hashi revenue comes from the US, and only 20 percent of the Forbes Global 2000 are users, and 75 percent of the company’s customers generate more than $100,000 of annual recurring revenue. IBM’s global reach and presence in many giant businesses means the CFO thinks growth opportunities are obvious.

IBM needs those opportunities because in its last earnings announcement it predicted “constant currency revenue growth consistent with its mid-single digit model.”

But Q1 2024 revenue was $14.5 billion, up just one percent or three percent in constant currency. Software revenue was up six percent in constant currency, but consulting revenue grew by just two points and infrastructure revenue was flat.

Net income of $1.6 billion was a $670 million jump from the same period in 2023.

In the Q&A segment of the call, analysts asked Krishna why IBM’s software portfolio isn’t growing as fast as rivals’. The CEO replied that IBM has grown its software revenue for four years’ running and there’s no reason that won’t continue.

One possible source of that growth, he said, is investment in Red Hat because Broadcom’s acquisition of VMware has focused users’ attention on choices for the platform they’ll use to host and build applications for the next 20 or 30 years. Between Red Hat’s existing portfolio and Hashi, Krishna thinks IBM is well-positioned.

He’s also bullish on generative AI, and pointed to a strong pipeline of consulting gigs to implement the tech.

But he also said buyers’ initial enthusiasm for generative AI has eased as they ponder whether it can generate return on investment. Users are finding that applying generative AI to a single business process could cost as much as $300 million, a figure Krishna said is unlikely to produce positive ROI.

“Advice I give to the C-Suite is not to do lots of little AI experiments,” he said, but instead to “pick use cases that can scale to impact a large slice of employees or customers and have revenue or productivity impact.” Such projects, the CEO suggested, are more likely to produce ROI.

IBM’s infrastructure business is also benefiting from AI, he said. POWER systems and IBM’s storage biz both grew by double digits. Even mainframes grew for the eighth quarter in a row, a fine result as Big Blue’s revenue from big iron usually spikes when a new model is released – as happened in May 2022 with the debut of the z16 – and then tapers off after a rush to get the new box. Maybe the rackable mainframes that debuted in April 2023 kept growth humming.

The company advised investors to “expect constant currency revenue growth consistent with its mid-single digit model”, but with a one-and-a-half to two-point headwind thanks to exchange rate fluctuations.

Investors weren’t impressed. In trading after the market closed, IBM’s share price dipped from over $184 to around $169. ®

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