Eighteen months ago, IBM posted cloud revenue of $5.5 billion for Q4 2017, putting it on an annualized run rate of $22 billion.
Yesterday—a full six quarters after that high point—IBM reported 12-month cloud revenue of $19.5 billion, up just 8% when adjusting for currency fluctuations. Otherwise, an anemic 5%.
Remember, I’m not talking about the company’s overall companywide revenue. I’m talking about its cloud revenue, a dynamic segment of the tech sector where other vendors in the Cloud Wars Top 10 are almost all growing at 25% or more. #1 Microsoft and #2 Amazon are growing at well over 40%.
What the heck is going on here?
How can IBM, with its massive customer base and with a portfolio of cloud services and technologies that, just 18 months ago, allowed it to generate more quarterly cloud revenue than either #1 Microsoft or #2 Amazon, be generating cloud-revenue growth of just 8%—or, less charitably calculated, 5%?
Reading Between the Lines of IBM’s Q2 Earnings
The results reveal quite starkly why IBM was willing to pay $34 billion for Red Hat. (That acquisition that just recently received full regulatory approval.) In its press release yesterday about its Q2 results, IBM said very little about its cloud performance for the past 3 months. Instead, the company tried to push the focus forward to an August 2 announcement about the role Red Hat will play in the future for IBM’s cloud business.
That comes through with striking clarity in these two comments from CEO Ginni Rometty in the press release:
- Referring to a revenue increase of just 3.2% for its Cloud and Cognitive Software unit, Rometty said, “In the second quarter, we continued to grow in the high-value areas of the business, led by a strong performance across our Cloud and Cognitive segment.” Sorry, but in today’s booming cloud business, 3.2% growth might be a lot of things, but it is not “strong.”
- Then, looking ahead to the impact of Red Hat, Rometty said, “With the completion of our acquisition of Red Hat, we will provide the only true open hybrid multicloud platform in the industry, strengthening our leadership position and uniquely helping clients succeed in chapter 2 of their digital reinventions.”
I have a great deal of respect for Red Hat and its potential within a technology-rich company like IBM. I recently offered some thoughts about that in Can IBM and Red Hat Deliver on Big Cloud Promises? 3 Key Questions.
But it’s important to understand the magnitude of the hopes IBM is pinning on Red Hat. Let me offer a few details about IBM’s cloud business over the past several quarters to illustrate why this deal is probably not just essential but indeed existential for IBM.
IBM Cloud Revenue from Q4 2017 through Q2 2019
First, let’s look at IBM’s quarter-by-quarter cloud revenue starting seven quarters ago when things looked so promising as its cloud revenue for Q4 2017 exceeded that of both Microsoft ($5.3 billion) and Amazon ($5.1 billion). And yes, of course, Q4 is the biggest quarter every year for IBM, so seasonality definitely plays a part, but look at the overall pattern across these last 7 quarters:
- Q4 2017: $5.5 billion
- Q1 2018: $4.2 billion
- Q2 2018: $4.7 billion
- Q3 2018: $4.5 billion
- Q4 2018: $5.6 billion
- Q1 2019: $4.4 billion
- Q2 2019: $4.7 billion
From another angle, here’s the trailing 12-month cloud revenue provided by IBM during each of those 7 quarters:
IBM Cloud Revenue for trailing 12 months from Q4 2017 through Q2 2019
- Q4 2017: $17 billion
- Q1 2018: $17.7 billion
- Q2 2018: $18.5 billion
- Q3 2018: $19.0 billion
- Q4 2018: $19.2 billion
- Q1 2019: $19.5 billion
- Q2 2019: $19.5 billion
IBM’s Numbers in Context
As you look at those numbers, consider the very different trajectories in IBM’s cloud business and Microsoft’s cloud business over that 21-month span.
As noted above, seven quarters ago in Q4 2017, IBM generated more cloud revenue than Microsoft did: $5.5 billion for IBM to $5.3 billion for Microsoft.
But for the most-recent quarter ended June 30, IBM reported cloud revenue of $4.7 billion, and later today when Microsoft releases its fiscal-Q4 results, it will almost certainly report cloud revenue for the same three months of just over $10 billion.
So in the span of those 7 quarters, from Q4 2017 when the companies’ cloud revenues were at relative parity, Microsoft’s quarterly cloud revenue now doubles that of IBM.
Pack a hearty lunch, Red Hat—you’ve got a very big job ahead of you!
Disclosure: at the time of this writing, IBM was a client of Evans Strategic Communications LLC.
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