Nearly two years after its mega-buy of Raleigh-based Red Hat, the new IBM has yet to fully
materialize - _and analysts are getting fed up._
A colossal understatement if there ever was one.
In the meantime, Red Hat proper is carrying on, in a sense, the way it always has. The firm
recently announced its first acquisition under the IBM umbrella, that of security-focused
StackRox.
Never saw any announcement on this. Just another acquisition.
https://www.bizjournals.com/triangle/news/2021/01/22/red-hat-carries-the-load-as-ibms-growth.html
By: Lauren Ohnesorge – Senior Staff Writer, Triangle Business Journal
Jan 22, 2021, 1:32pm EST
Nearly two years after its mega-buy of Raleigh-based Red Hat, the new IBM has yet to fully materialize - and analysts are getting fed up.
Right now, it’s still more talk than action, said Logan Purk, an analyst with Edward Jones.
"They still just need to execute," he said.
Armed with a spin-off, a new Red Hat sales lead and an increasingly digital post-pandemic world, IBM executives once again find themselves saying better days are coming.
IBM (NYSE: IBM) – with Red Hat tower in downtown Raleigh and a sprawling campus at Research Triangle Park – on Thursday reported $73.6 billion in revenue for the year, down about 5 percent. But Red Hat, which it bought out two years ago, saw its revenue increase 18 percent.
Thanks to Red Hat, expectations have never been higher. But with high expectations come challenges. IBM is expecting Red Hat to be its “growth engine” in the coming years, Purk said.
But can it execute? Executives said Thursday that it can, in spite of the ongoing pandemic, management changes and a corporate image viewed as the big corporate Goliath compared to nimble, culture-first software firms like Red Hat.
IBM is putting pressure on a man named Larry Stack, the newly-named executive vice president of global sales and services at Red Hat, to drive its sales trajectory.
The company has made no secret of its plans to bank big on the cloud, having dropped $34 billion on Raleigh-based Red Hat in 2019. At the time of the deal, then-CEO Ginni Rometty was clear in her ambitions for the transaction – to become the world’s largest cloud company. And to do it while keeping Red Hat’s “open organization” culture intact.
“Red Hat is still Red Hat,” then-Red Hat CEO Jim Whitehurst said repeatedly during deal briefings. Culture, executives still say, is Red Hat’s secret weapon.
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Arun Oberoi, the retiring head of sales for Red Hat, said maintaining that culture up to this point has been his proudest accomplishment.
“If we take a look at our business trajectory, I keep saying this – as good as the past has been, really the best in the world is yet to come,” he said. But Oberoi won’t be the one driving that future as he’s being replaced by company veteran Stack.
Stack, a Washington, D.C., military veteran with tenure at the United Nations on top of tech firms such as HP and Fujitsu, said in an interview that he knows what’s at stake. And he said it’s bigger than IBM. With the pandemic, the onus is on technology to effect real change, he said.
“Technology can solve some of the world’s most difficult problems,” he said. “I don’t think the military can change it as fast, I don’t think government and politics can change it as fast.”
He said the world needs an “open source” mindset, “so everybody can bring their best thinking to it.” And that the firm’s culture is key to spreading that message.
Stack said Red Hat has a real opportunity to be a leader in a world that, with remote working, has become even more reliant on technology. In his first 100 days as sales leader, he plans to set a “North Star and a clear mission objective for the next three years.” It’s a global sales and services plan he’ll develop with both ecosystem partners and IBM, he said.
“How do we set Red Hat up for success, not only for the next two or three years … how do we set them on track when they become a $30 billion software company?” he said.
Stack’s role is just one of many changes to hit IBM and Red Hat since the acquisition.
Since the deal
The dust had barely settled on the deal when Rometty’s retirement was announced. And IBM again showed its emphasis on a cloud future by installing Arvind Krishna, former senior vice president for cloud and cognitive software, as its next CEO. Doubling down on its Red Hat focus, the firm named former Red Hat CEO Whitehurst as the new president of IBM. Whitehurst was replaced by longtime Red Hat veteran Paul Cormier, president of products and technologies.
By keeping a CEO at the helm of Red Hat, the open source software firm could stay agnostic and continue to work with IBM’s competitors, Whitehurst said. And by keeping a familiar face in the seat, there would be minimal disruption, execs likely thought.
And just as the dust was settling on the C-suite shakeup, Krishna made what might have been the firm’s second biggest play toward that cloud future, announcing the spin-off of IBM’s managed infrastructure services unit into a new public company.
“The acquisition of Red Hat allowed us to build an open and secure hybrid cloud platform that cuts across all places our clients do computing – on-premise, private and publicly-operated public cloud environments,” he wrote at the time. “This was the first major step to seize this opportunity and underpins everything that has followed.”
By sloughing off the business unit, IBM can go all in on cloud, “sharpen[ing] its focus,” he added last year.
While the deal for “NewCo” has yet to close, that “sharpening” hasn’t happened as quickly as analysts had hoped.
While Red Hat continues to deliver, IBM isn’t – at least not fast enough for analysts. And that puts more pressure on Stack and his team to keep executing and punching bigger than Red Hat’s weight.
Friday, David Holt, an analyst with CFRA lowered his firm's target on IBM to "hold" from "buy," writing in a note to investors that, with "fading credibility of the management team and an inability to directly answer questions on the call" it could no longer recommend the stock.
“The cloud business and Red Hat still seem to do well, but the legacy business … it continues to struggle to show any meaningful turnaround,” Purk said after Thursday’s earnings call.
IBM shares dropped 10 percent on the earnings report and were trading around $120 Friday afternoon – more than 24 percent below the 52-week high of $158.75.
What’s next?
The Red Hat deal, Purk said, was “the right move, it’s just that there’s a lot of execution that they have to nail to make this work.”
IBM leadership isn’t as transparent as he’d like when it comes to illustrating what a new IBM could potentially look like.
On the call Thursday, Krishna tried to get analysts focused on sales growth and free cash flow instead of earnings. But Purk said he was left wanting “a little more color besides saying mid-single-digit growth.”
“Once this spinoff happens, Red Hat becomes the growth engine of IBM,” Purk said. And that makes Stack’s new role over Red Hat sales critical.
“There is a need to continue to execute and deliver these double-digit growth rates that Red Hat has shown historically,” Purk said. “Red Hat will have to keep that going so that, overall, this new IBM can hit their expected growth targets.”
In the meantime, Red Hat proper is carrying on, in a sense, the way it always has. The firm recently announced its first acquisition under the IBM umbrella, that of security-focused StackRox.
Krishna told analysts to expect the firm to be “an even larger contributor to revenue growth” after the NewCo spinoff. IBM has about 2,800 clients using its hybrid cloud platform, more than a thousand new enterprise clients since it acquired Red Hat.
The Red Hat backlog, at the end of the quarter, had crossed $5 billion for the first time. Executives have said they’re bullish about its continued success.