All the key info as IBM opens up on restructuring

IBM CFO explains rationale behind recent acquisitions and sales following slight revenue rise

IBM has reported a three per cent year-on-year revenue decline for the quarter ending 31 December 2018, despite seeing growth in its Global Business Services and Cognitive Solutions arms.

Revenue for the full year was up one per cent to $79.76m (£61.14m).

We highlight the key information from IBM's lengthy quarterly report here.

Strategic imperatives are good

The areas IBM is pinning its hopes and dreams on saw year-on-year growth of nine per cent in the quarter, with sales up to $40bn.

This includes cloud revenue which was up 12 per cent to $19bn, according to CFO Jim Kavanaugh, who said that cloud revenue-as-a-service is at an annual run rate of $12bn (up 21 per cent over the last year).

On an earnings call, transcribed by Seeking Alpha, Kavanaugh said that these strategic imperatives, which include high-margin technologies such as artificial intelligence (AI), now consistently make up over half of IBM's business over a given quarter.

Sales in cognitive solutions - which includes solutions software and analytics - was flat for the year at $18.4bn.

IBM has been hard at work trimming this division into shape and offloaded a $1.8bn chunk of its software business at the end of last year.

The technology services unit saw sales increase slightly to $34.5bn.

Legacy business is bad

IBM's traditional business continues to weigh heavy, with its systems business seeing quarterly sales drop 21 per cent year on year to $2.6bn - which it attributed to cycles with its IBM Z mainframe.

This was however against a strong comparison quarter in 2017, when IBM Z was at the beginning of its cycle.

Storage hardware was also down, with declines in mid-range mitigated by strong growth in all-flash arrays.

These hardware cycle struggles were blamed for a three per cent revenue decline in technical support services.

Kavanaugh said: "While there is volatility in the hardware due to product cycles, as we continue to grow our install base, up roughly 3.5 times over the last decade, this provides stability in our related software, services and financing business across IBM."

IBM is shunning low-margin services

Big Blue is increasingly moving away from low-margin areas, hence the sale of the software assets mentioned above.

Both of its huge consultancy arms - Global Business Services (GBS) and Global Technology Services (GTS) - were flat in 2018 and down slightly in Q4.

But Kavanaugh said that IBM is pleased with the progress it has made trimming the fat.

"These latest actions really centre on disciplined portfolio prioritisation around market attractiveness, around differentiation and around how they really play to the integrated value of the IBM portfolio," he said.

"They were basically more and more sold as standalone-only products and offerings that can be leveraged and delivered to our clients through a different partner, who will make the investment prioritisation as we move forward."

Kavanaugh also hinted that IBM's period of acquisitions and divestitures is not over.

"We're always looking at portfolio optimisation, and how we prioritise our investment and capital allocation and you see that with the announcement of Red Hat and what we just did with cognitive and GBS," he said.

"But as we go forward, we're going to continue to prudently manage our portfolio and operate that financial discipline in terms of acquisitions. Our strategy hasn't changed. It's always been built around supporting high value.

"We have great cashflow and we have enough financial flexibility to continue to invest in our business and returning value to our shareholders over the long term. So we feel pretty good."

Red Hat is the key

IBM is still not done dining out on its monster acquisition of Red Hat, which it consistently proclaims a game changer in the hybrid cloud market.

On the earnings call Kavanaugh made sure to, in his words, "remind you of the value we see from the combination of IBM and Red Hat", which he said is "all about accelerating hybrid cloud adoption".

"The client response to the announcement has been overwhelmingly positive," he claimed.

"They understand the power of this acquisition, and the combination of IBM and Red Hat capabilities, in helping them move beyond their initial cloud work to really shifting their business applications to the cloud.

"They are concerned about the secure portability of data and workloads across cloud environments, about consistency in management and security protocols across clouds, and in avoiding vendor lock-in. They understand how the combination of IBM and Red Hat will help them address these issues."

Kavanaugh said that Red Hat's bookings figures prove that the market supports the deal. He explained that the vendor plans to use the partnership as a way to sell its IBM Cloud across a broader range of platforms.