IBM’s Red Hat acquisition boosts disappointing third-quarter earnings

Though IBM's performance is lacking, its recent acquisition of Red Hat shows promise in Q3 2019.

On Wednesday, IBM posted its Q3 2019 earnings, which revealed that the firm’s revenue has fallen for the fifth consecutive quarter. The firm generated $18 billion in revenue in the period ending on September 30, a year-on-year decline of 3.9 percent. As such, the company missed analyst estimates of $18.2 billion and its stock price shrank by 3.2 percent.

However, the legacy brand modestly defied expectations in terms of profit, earning $2.68 per share versus forecasts of $2.67. More importantly, the corporation’s earnings report indicated that it made the right call with its most recent acquisition.

Why is IBM Failing?

Formerly one of the most dominant technology companies in the world, IBM has experienced a steep decline throughout the 2010s. Like many aging corporate titans, the 108-year-old tech firm made a multibillion-dollar bet that didn’t pay off and got out-innovated by its competitors. Specifically, the organization tied its fortunes to the Watson supercomputer in the mid-2000s.

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IBM intended for its mainframe to be used in everything from healthcare maintenance to weather forecasting to advertising. Unfortunately, the machine’s shortcomings have prevented it from becoming a real game-changer. Besides, the firm’s Watson myopia caused it to lose focus on developing its other offerings. That blunder has severely hurt its sales.

In Q3, the multinational corporation’s Global Business Services unit rose by one percent year-on-year, earning $4.12 billion. IBM’s systems revenue only brought in $1.48 billion last quarter, a dip of 14.7 percent from the same frame the year previous.

While IBM floundered, competitors Amazon and Microsoft realized that the future of computing lies in the development of infrastructure as a service products. As such, the two tech giants represent 47.8 percent and 15.5 percent, respectively, of the public cloud services market.

Since IBM has had to play catch up, it only has a 1.8 percent market share of the cloud sector. Ironically, the conglomerate’s Q3 earnings suggest that virtual networking offerings represent a possible way forward.

Red Hat Revival

Last November, IBM hitched its future to another big bet, purchasing open-source cloud services company Red Hat for $34 billion. One of the largest technology industry acquisitions ever, the corporation hoped to use its new subsidiary to become a leader in the enterprise cloud sector. Thankfully, as opposed to Watson, the firm’s new gamble seems to be paying off.

In July, IBM closed its purchase of Red Hat and absorbed the firm into its cloud division. In Q3, the subsidiary generated $371 million in revenue, which beat the company’s forecast by $21 million. Furthermore, Red Hat’s impressive performance drove IBM’s cognitive and cloud segment to a 6.4 percent increase from last year.

On an investor call, CFO Jim Cavanaugh said that his company expects to achieve a sustainable level of revenue growth next year. If Red Hat can continue its upward trend through 2020, IBM should be able to stop the bleeding.