RESEARCH TRIANGLE PARK – Jim Kavanaugh, IBM’s Senior Vice President and Chief Financial Officer, spent a good deal of a conference call with Wall Street analysts on Tuesday evening to talk very positively about Big Blue’s pending acquisition of Raleigh-based Red Hat.
Here are some highlights from the call as Kavanaugh made clear that the Red Hat deal announced last October is seen as a way to drive revenue growth and profits for the tech giant as it continues to struggle to boost sales.
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Regulatory approval
“Together, we will be ideally positioned to help our clients shift their business applications to hybrid cloud, while addressing the issues I just mentioned around portability, management consistency, security, remaining open, which avoids vendor lock-in. This will not only enhance the growth of Red Hat business after closing but with all of IBM, as we saw more of our data and AI software on containers across multiple platforms and more of our services from app modernization to multi-cloud managed services. … We’re moving through the regulatory process and continue to expect to close in the second half of 2019.”
$1 trillion cloud opportunity
“First and foremost we’re very excited about the potential combination of IBM and Red Hat as we talked about I think in a handful of other areas around us accelerating the leadership in a $1 trillion hybrid cloud market. We believe this differentiates us as we move forward and we can’t be more excited when you look at Red Hat performance, exiting fiscal year 19 and what they reported and shared publicly, accelerating revenue up in the high teens, there backlog is up 22% if I remember correctly, strong margin contribution and they are delivering very strong cash flow.”
Preparing to scale up Red Hat practice
“Turning to GBS [global business services] profits, our gross margin was 26%, which is up 280 basis points, driven by our mix of higher value offerings, the yield on our productivity and utilization initiatives and a continuing help from currency, given our global delivery mix. This enables us to make investments as we prepare for the Red Hat acquisition, such as scaling our existing Red Hat practice to enhance our journey to cloud offerings for clients leveraging Red Hat capabilities.”
Cash and debt
“Looking at the balance sheet, we closed the quarter with a cash balance of over $18 billion and total debt of $50 billion. Both of these are up from December as we prepare for the acquisition of Red Hat later in the year.”
Divesting to focus on Red Hat
“We’re continuing to prioritize our investments and announced additional actions to divest some businesses that aren’t contributing to the integrated value proposition for our clients. And we’re continuing our planning and preparation for the acquisition of Red Hat. With this performance, we continue to expect to deliver at least $13.90 of operating earnings per share and about $12 million of free cash flow.”
“From a product perspective, around the announced divestitures which most recently included the sale of our marketing and commerce remaining products Centerbridge that on an annualized basis about $1.8 billion, right. From a profit perspective very said very consistent the last quarter that we are going to have a gain on the sale, we’re going to have a foregone profit and stranded cost, we were going to take actions to address the foregone profit — or excuse, the stranded cost and structure of our business overall.”
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