RESEARCH TRIANGLE PARK – IBM today announced the company’s second-quarter 2022 earnings results, which were summarized by the company’s chairman and CEO Arvind Krishna as a “good revenue performance.”  But the price of the company’s stock appears to be sliding in aftermarket trading.

Krishna reported the company’s revenue was $15.5 billion, which is an increase of 9%.

And the company’s focus on hybrid cloud, through Red Hat, is playing a role in that growth.

“Our first half results were solid,” said James Kavanaugh, IBM senior vice president and chief financial officer, during an earnings call held on Monday.  “Our recurring revenue stream and solid cash generation position us well to continue to invest in R&D, acquire new companies, and strengthen our talent in every part of the business, while also returning value to shareholders through our dividend.”

But Kavanaugh noted that the company would face headwinds, including a rapidly changing currency market and the company’s decision to remove its operations from Russia, which impacted the company to the tune of about $100 million, Kavanaugh said.

IBM beats Street, stock jumps on stronger than expected earnings report

Changing currency markets

It’s the changing currency markets that led the company to alter its forecast, said Kavanaugh, who described the impact of a “sharply strengthening dollar” in the prior 90 days as a headwind the company would face in the remaining six months of the year.

“We are not immune,” said Kavanaugh, adding that though IBM enacted programs to hedge currency risk, Kavanaugh noted that “we don’t hedge 100%.”

Though surpassing quarterly revenue estimates, the company’s stock price dropped about 4.25% in after-hours trading as the company took a nearly $1 billion hit due to the rising dollar.

“Especially when currencies move at the rate, breath, and magnitude that we’ve seen,” said Kavanaugh.  He noted that the U.S. dollar index is up year-to-date by 13% and added that the strengthening is the fastest experienced in the decade.  “It’s kind of, quote-unquote, unprecedented,” he noted, adding that the company operates in more than 100 currencies across the globe.  But the company only hedges 35 currencies, and only 12-months out, he stated.

“Eventually, what hedging does is mitigates volatility in the near term, it does not eliminate currency, it allows you time to adjust your business model,” he said.

One further factor that the company is bracing for: rising labor costs.

Kavanaugh noted that the company has already adjusted for rising labor costs, through updating pricing, but noted during the earnings call that given how the company’s contracts are formed and when revenue is realized, these changes will take some time to adjust the company’s margins.

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Red Hat and hybrid cloud continue to drive growth, revenue

“Every reason to believe that technology spending in the B2B space will continue to surpass GDP growth,” said Arvind Krishna, IBM chairman and chief executive officer, during the earnings call on Monday.

And driven by demand for digital transformation, IBM’s clients are turning toward hybrid cloud solutions and consulting services, leading to strong growth and performance.

“In the quarter we delivered good revenue performance with balanced growth across our geographies, driven by client demand for our hybrid cloud and AI offerings,” said Arvind Krishna, IBM chairman and chief executive officer, in a statement issued alongside the company’s quarterly earnings call.  “With our first half results, we continue to expect full-year revenue growth at the high end of our mid-single digit model.”

Red Hat, which was acquired by IBM three years ago, saw a growth rate of 17%, compared to 12% overall revenue growth.  “Drove pervasive growth across Red Hat,” said Kavanaugh.  “Red Hat revenue, all-in, grew 17%,” noted Kavanaugh, adding that such growth was fueled by new adoption.

And revenue from hybrid cloud now represents 36% of the company’s total revenue, said Kavanaugh.

Still, there was a deceleration when it comes to growth for Red Hat, as the company’s first quarter growth rate was 18%, according to a prior statement released by IBM alongside its first quarter 2022 earnings report, which was better than analysts expected.

Krishna, in answering a question during the earnings call, noted that the company’s model is to drive growth in the “high teens,” and reaffirmed that the company remains satisfied with the performance of Red Hat.

Further, according to Kavanaugh, Red Hat Open Shift is now, three years after the IBM acquisition, driving four and a half times the revenue compared to prior to acquisition.  “We feel pretty good about our Red Hat portfolio overall,” said Kavanaugh.

IBM unveils roadmap for developing quantum-powered supercomputers

Other highlights from IBM earnings call

Krishna highlighted the company’s quantum computing roadmap, which the company announced in May 2022, noting that IBM will deliver additional quantum computing systems, including a 1,000 qubit system this year and a 4,000 qubit system next year.

The company acquired two other firms in the quarter, adding to the now more than two dozen acquisitions the company has made in the prior two years.  In total, said Kavanaugh, the company spent nearly $1 billion to acquire those two firms, and the company also returned approximately $3 billion in dividends to its shareholders in the quarter, leaving the firm with $7.8 billion in cash on hand, up a bit from year-end 2021.

Other details disclosed by the company in its statement:

• “Revenue of $15.5 billion, up 9 percent, up 16 percent at constant currency (about 5 points
  from sales to Kyndryl)”
• “Software revenue up 6 percent, up 12 percent at constant currency (about 7 points from
  sales to Kyndryl)”
• “Consulting revenue up 10 percent, up 18 percent at constant currency”
• “Infrastructure revenue up 19 percent, up 25 percent at constant currency (about 7 points
  from sales to Kyndryl)”
• “Hybrid cloud revenue, over the last 12 months, of $21.7 billion, up 16 percent, up 19 percent
  at constant currency”
• “On a consolidated basis, year to date, net cash from operating activities of $4.6 billion; free
  cash flow of $3.3 billion”