IBM hybrid cloud strategy driving revenue growth

IBM's hybrid cloud focus is paying off, with the company reporting fourth-quarter revenue up 6.5% to $16.7 billion compared with the same quarter last year, driven largely by increased adoption of its hybrid cloud offerings.

Hybrid cloud revenue in the fourth quarter was $6.2 billion, up 16%, and for the full year totaled $20.2 billion, up 20% over the year-ago quarter's number. The company's overall software revenue rose 8%. IBM's consulting revenue gained 13%.

Red Hat was the primary driver of the gain made in hybrid clouds, showing a 19% increase in sales. IBM's automation software went up 13% for the quarter, its data and AI revenue rose just 1% and security revenue fell 2%.

Arvind Krishna

"We increased revenue in the fourth quarter with hybrid cloud adoption driving growth in software and consulting," said Arvind Krishna, IBM chairman and CEO, during the quarterly meeting. "Our fourth-quarter results give us confidence in our ability to deliver our objectives of sustained mid-single digit revenue growth and strong free cash flow in 2022."

The 6.5% jump in revenue was a significant increase  over the last year's third-quarter performance, which was a very modest 0.3% increase. This marks the third consecutive quarter of positive growth for the company.

One analyst was encouraged by the performance of IBM's hybrid cloud business given the strategic importance the company has placed on it, along with the $34 billion it spent on the Red Hat acquisition in 2019.

"The hybrid cloud arena is the only arena where they are particularly competitive at the moment, which is a good thing," said Trevor White, research manager with Nucleus Research. "In the post-Ginni Rometty era, it's going to be all about hybrid clouds. It's what they are betting their future on."

The hybrid cloud arena is the only arena where they are particularly competitive at the moment, which is a good thing. It's what they are betting their future on.

In general, the hybrid cloud market is expected to grow in the year ahead as organizations look to balance public cloud and on-premises deployments, which, for many IT departments, means modernizing on-premises data centers in a cloud-like way. In the "2022 Technology Spending Intentions Survey" by Enterprise Strategy Group, 52% of respondents said they planned to increase spending on hybrid and private cloud infrastructure software.

The company's infrastructure business reported $4.4 billion in sales, down 2.2% with its hybrid infrastructure flat. Distributed infrastructure products were up 5%, with infrastructure support down by 1%.

One soft spot was IBM's Z series mainframe business, which dropped 6%. Krishna said he expects that business to rebound in the second half of this year following a new system rollout.

This was the first earnings report since IBM spun off its $19 billion infrastructure services business, now called Kyndryl, in early November. The loss of revenue didn't appear to hurt the rest of IBM's existing infrastructure business, which may prove Krishna's instincts correct when he said he planned to pare back parts of the business that didn't fit with his vision for the company.

In another example of paring back what doesn't fit, IBM also sold most of the assets of its Watson Health division to Francisco Partners. IBM spent billions on the division, but it never took off.

"These moves reflect the fact they are committed to focusing on their core hybrid cloud business," Nucleus' White said. "Getting rid of all these extra pieces could end up making them a better, more competitive company down the road," he said.

Cash from operating activities was $12.8 billion, the company reported, with free cash flow coming in at $6.5 billion. These results include 10 months of Kyndryl's contributions as well as cash paid last year for separation charges and structural actions taken in the fourth quarter.

Big Blue reported pretax income of $2.9 billion in the quarter, representing a 183% increase while operating, or non-GAAP income, was $3.5 billion, up 102%.

Enterprise Strategy Group is a division of TechTarget.

As editor at large with TechTarget's news group, Ed Scannell is responsible for writing and reporting breaking news, news analysis and features focused on technology issues and trends affecting corporate IT professionals.