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(Bloomberg) – International Business Machines Corp. announced its biggest revenue increase in three years thanks to strong demand for cloud computing, beating analyst estimates and signaling that CEO Arvind Krishna’s pivot to the rapidly growing market is starting to pay off. The shares jumped up 4.3% in extended trading in New York.
Sales rose 3.4% to $ 18.7 billion for the three months ending June 30, the Armonk, New York-based company said on Monday in a statement. This was well ahead of the $ 18.3 billion analysts had forecast, on average, according to data compiled by Bloomberg.
“The growth we’re seeing is very encouraging,” CFO Jim Kavanaugh said in an interview. “This is proof that our customers are adopting the hybrid cloud platform. “
Krishna, who took over as CEO at the height of the pandemic, worked – even before taking the top post – to lead Big Blue to the cloud and artificial intelligence in a bid to modernize the business . IBM has struggled to revive revenue growth in recent years as its once core business, which traditionally focused on mainframes and IT services, stagnated as companies shifted more of their operations to Internet.
IBM completed the $ 33 billion purchase of Red Hat in 2019, the first step in a transition to what it calls hybrid cloud, which allows businesses to use a combination of their own data centers and computer resources rented from others and accessible online. The company’s competitors, notably Microsoft Corp. and Alphabet Inc.’s Google, have also decided to extend the use of artificial intelligence to cloud computing customers in various industries.
The company will need to convince investors that it can continue on its course without Jim Whitehurst, who stepped down as chairman earlier this month. Whitehurst was the former CEO of Red Hat and played a key role in Krishna’s hybrid cloud strategy. IBM said Whitehurst will continue to work as a senior advisor.
The second quarter revenue gains were driven by IBM’s Global Business Services and Cloud and Cognitive Software units, which saw sales increase 12% and 6%, respectively. Meanwhile, the Global Technology Services unit, much of which is on track to be split up by the end of the year, has seen virtually no revenue gains. The new company will be called Kyndryl and will be based in New York.
Total cloud revenue increased 13% from a year ago to $ 7 billion, as Red Hat sales jumped 20% in the quarter. IBM reaffirmed its earlier forecast for revenue growth for the full year. “We are pleased with the first signs of progress,” Krishna said on a conference call about the company’s move to cloud and AI. “However, it will be some time before we realize the full benefits of these changes.”
IBM shares have gained 9.6% this year to $ 137.92 at Monday’s close, compared with a 13% increase for the S&P 500 Index.
Under Krishna’s tenure, the company embarked on a wave of acquisitions. IBM spent around $ 3 billion in the first half of this year to build cloud and AI capabilities, according to Kavanaugh. In April, the company announced it would buy Turbonomic Inc. in a deal valued at $ 2 billion, and acquired Italian process mining company myInvenio. More recently, IBM purchased Madrid-based Bluetab Solutions Group with the aim of expanding its reach in Europe and Latin America.
Net income fell 2.6% to $ 1.33 billion. Operating profit was $ 2.33 per share, beating the average analyst estimate of $ 2.28. The gross operating margin corresponds to the 49.3% expected by analysts.
(Updates with CEO comments in eighth paragraph.)
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