International Business Machine Corp.'s (IBM, Financial) investments in the hybrid cloud platform are beginning to pay off.
On Monday, IBM reported the highest quarterly sales growth in more than two years, boosted by its high-margin cloud computing business.
"Strong performance this quarter in the cloud, driven by increasing client adoption of our hybrid cloud platform, and growth in software and consulting enabled us to get off to a solid start for the year," Chairman and CEO Arvind Krishna said. "While we have more work to do, we are confident we can achieve full-year revenue growth and meet our adjusted free cash flow target in 2021."
IBM's revenue for the first quarter of 2021 were $17.7 billion, up 1%. Total cloud revenue for the first quarter came in at $6.5 billion, up 21% over the previous quarter. Over the last 12 months, cloud revenue grew 19% to $26.3 billion.
The rise in IBM's cloud revenue results from "creative destruction," a strategy the company launched almost a decade ago. As part of this initiative, it is dropping mature, low-profit technology businesses and replacing them with emerging high-margin markets like the cloud and internet security.
Then there's IBM's big bet on a fast-growing segment within the cloud market -- the "hybrid" multi-cloud, a computing environment that combines multiple cloud providers and clouds, including public, private and software-as-a-service.
A vital part of this strategy was the acquisition of Red Hat. The open-source technology company brought to IBM an innovative hybrid cloud platform and a vast open-source developer community.
Now this acquisition has begun to pay off as Red Hat revenue was up 17% in the first quarter (up 15% adjusting for currency).
Still, IBM's creative destruction strategy has been a slow and painful process, with the company's competitive advantage still eroding. Its economic profit, the difference between the return on invested capital and weighted average cost of capital—a measure of a company's competitive strength--has declined from 14% a decade ago to -0.68% currently.
A negative economic profit means the company destroys value as it grows, which will make it hard for Big Blue to continue paying its generous dividend.
But James Kavanaugh, IBM senior vice president and chief financial officer, doesn't seem concerned.
"With strong cash generation and disciplined financial management, we increased investments in our hybrid cloud and AI capabilities while significantly deleveraging in the quarter and supporting our commitment to a secure and growing dividend," he said following the company's first-quarter earnings report.
Only time can tell whether IBM's management will fulfill this commitment.
Disclosure: No shares.
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