IBM falls on lukewarm growth for Red Hat software business

[NEW YORK] International Business Machines (IBM) reported disappointing revenue in its closely watched Red Hat unit, sparking concerns among investors who see the software business as among the keys to the company’s growth.

Third-quarter sales in the hybrid cloud unit that includes Red Hat increased 14 per cent, a slowdown from the previous period and below analysts’ average estimate of 16 per cent.

While revenue decelerated, “we feel very good about the growth opportunities in Red Hat overall”, chief financial officer Jim Kavanaugh said. The unit helps customers manage their data and applications among different types of computing equipment.

The shares have climbed this year on investor enthusiasm for IBM’s software business, which is fuelled by acquired divisions Red Hat and HashiCorp. Chief executive officer Arvind Krishna has pushed software to become IBM’s largest business, especially as the consulting unit has been buffeted in recent years by customer concerns about the overall economy.

For the year ending in December, IBM said free cash flow will be about US$14 billion, ahead of analyst estimates of US$13.5 billion. Revenue will expand at a rate beyond 5 per cent in constant currency, the company added, in line with estimates.

The shares declined about 5 per cent in extended trading after closing at US$287.51 in New York. The stock had gained 31 per cent this year through the close.

Total sales jumped 9.1 per cent to US$16.3 billion in the period ended Sep 30, the company said on Wednesday. Profit, excluding some items, was US$2.65 per share. Analysts, on average, anticipated earnings of US$2.41 per share on US$16.1 billion of revenue.

Bookings for IBM’s AI business have exceeded US$9.5 billion since mid-2023, the Armonk, New York-based company said. That has increased from the US$7.5 billion IBM disclosed during its earnings report in July. About 80 per cent of the bookings come from the consulting unit, with the rest in software.

The company is seeing more of its bookings convert into revenue as customers are putting AI projects into production, Kavanaugh said. This is helping fuel an “inflection” in growth for the consulting business, he added.

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Consulting revenue increased 3.3 per cent to US$5.32 billion in the quarter, just ahead of estimates. IBM’s software unit grew 10 per cent to US$7.21 billion, in line with estimates.

Infrastructure revenue jumped 17 per cent to US$3.56 billion, fuelled by the second quarter of sales for IBM’s new z17 mainframe server models. BLOOMBERG