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IBM's new CEO makes commitment to IT, reports cloud gains

IBM cloud revenues saw incremental first quarter growth, despite the March slump due to COVID-19, and the new CEO promised to pursue a more aggressive cloud and AI strategy.

IBM's new CEO promised IT pros that its future products will focus on quality, with a growth strategy centered around hybrid cloud, AI and acquisitions.

That declaration came during this week's earnings call, where IBM reported incremental increases in its cloud, cognitive software and systems revenues for this year's first quarter, although its overall revenues were down.

Revenues from Big Blue's cloud and cognitive software businesses rose 5% for the quarter, while its systems business, led by its Z series mainframes, increased 3% and its Global Business Services group reporting flat sales. Over the past four quarters, IBM's cloud revenues were $22 billion, up 16% over the four quarters previous to that.

Arvind Krishna, IBM's newly appointed CEO, made his debut on this week's analyst call with the promise to be "completely transparent and open" with employees and customers. To that end, Krishna said his approach in the second quarter and going forward will have a hard focus on growth via hybrid cloud and AI technologies, products such as Kubernetes and OpenShift, as well as acquisitions.

Arvind KrishnaArvind Krishna

"I want IBMers to lead with a more technical approach and have a relentless focus on quality," Krishna said. "I'm going to focus on growing the value of the company, which means better aligning our portfolio around hybrid cloud and AI to meet the evolving needs of the market."

IBM has been unafraid recently to divest itself of software and services that did not best serve the company's longer-term strategy, Krishna said, and he plans to continue with that philosophy. He also made it clear the company going forward won't hesitate to try new approaches to running its business.

"The past few weeks have catapulted us into the world of virtual selling and remote delivery, entailing new ways of working," he told analysts. "This is a reminder, we should always be asking ourselves, 'Is there a better way to do this?' If you don't question why you're doing things, you'll never evolve into something better," he said.

Because of the coronavirus crisis, 95% of IBM's 350,000 employees now work remotely, with only 8,000 traveling to essential sites to "carry out mission-critical work," Krishna said.

One analyst said IBM, like many other companies, lost sales momentum in March because corporations pulled back planned purchases to a later date. He added, however, that IBM's first quarter wasn't as bad as it could have been, particularly cloud revenues.

"Ginni [Rometty, former IBM CEO] left a low bar to get over, so anything that wasn't terribly negative was essentially positive," said Ian Campbell, CEO of Nucleus Research, an IT research firm.

If IBM can execute on Krishna's plan around the cloud and AI, Campbell believes the new CEO has a good chance to succeed given the continued growing interest among large corporate customers' desire to move mission-critical workloads off on-premises workloads up to the cloud. That desire is being fueled by COVID-19, which has pushed IT shops to speed up their IT transformation efforts and sped cloud migrations.

Ginni [Rometty, former IBM CEO] left a low bar to get over, so anything that wasn't terribly negative was essentially positive.
Ian CampbellCEO, Nucleus Research

IBM should be well-positioned to take advantage of moves to the cloud when this crisis is over, but Krishna must continue his strategic focus on things like Kubernetes, integrating AI with the cloud, Red Hat and helping enterprise customers move to a hybrid model, Campbell said.

"It makes even more sense today than it did two months ago," he said.

While revenues derived from Red Hat dropped from 24% in the previous quarter to 18% in the latest quarter, Krishna said Red Hat recently signed two of the largest deals in its history and that there are "a few more large deals in the pipeline."

Red Hat Enterprise Linux is proving to be mission-critical for more customers, according to Krishna, who reported during the earnings call that application development and emerging technologies grew 40% this quarter driven by Red Hat's OpenShift and Ansible.

Overall revenues for the first quarter were $17.6 billion, down 3.4%, although they were up 0.1% when adjusting for divested businesses and currency. IBM Revenues Global Technology Services, which includes the company's infrastructure and cloud services and technology's support services, were $6.5 billion, down 6%, or 4% when adjusting for currency. The company's systems hardware business generated revenues of $1.4 billion, or 3% growth, with its Z mainframes up 59%. Revenues from Big Blue's storage unit were $299 million, down 26% compared with last year's first quarter.

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