IBM fell due to weak consulting sales, acquiring HashiCorp under a cloud of uncertainty

According to Zhitong Finance APP, IBM (IBM.US) disappointed investors with weak sales in its consulting division, causing a drop of about 9% in after-hours trading, casting a shadow over its acquisition of software company HashiCorp (HCP.US).

The company stated on Wednesday that IBM's first-quarter revenue increased by 1% year-on-year to $14.5 billion. IBM also reiterated its previous outlook that free cash flow will reach $12 billion in the fiscal year ending in December.

In addition, IBM announced that it has agreed to acquire HashiCorp for an enterprise value of $6.4 billion. HashiCorp primarily sells software that helps enterprises manage cloud computing operations. This is IBM's largest acquisition since acquiring software company RedHat for $31.8 billion in 2019.

This deal is another move by IBM CEO Arvind Krishna to transform the traditional tech hardware company into a focus on high-growth software and services company. IBM has made other acquisitions in this field, such as acquiring Apptio for $4.6 billion last year and divesting its managed infrastructure, weather, and health businesses.

Krishna stated, "HashiCorp has a strong track record in helping customers manage today's complex infrastructure and applications." "Combining IBM's product portfolio and expertise with HashiCorp's capabilities and talent will create a comprehensive hybrid cloud platform designed for the era of artificial intelligence."

The stock closed at $184.10 in New York and fell to a low of $166.51 in after-hours trading. So far this year, the stock has risen by 13%, outperforming the S&P 500 Information Technology sector index's 6.2% increase.

IBM CFO Jim Kavanaugh stated in an interview that through the acquisition of HashiCorp, IBM will push Red Hat products to its global customers, running the "Red Hat playbook." He added that this deal will increase EBITDA in the first year and as part of IBM, HashiCorp's free cash flow profit margin will rise to 30% to 40%.

Krishna mentioned in the statement that since mid-2023, IBM's bookings in AI-focused products and consulting have exceeded $1 billion. About two-thirds of this figure are consulting services, with most expected to be recognized as revenue by 2025 Investors have been paying close attention to the potential decline in IBM's second-largest business consulting division. As of March 31, the department's revenue was $5.2 billion, flat compared to the same period last year.

Anurag Rana, a senior analyst at Bloomberg Intelligence, wrote that the performance of the consulting business reflects "soft IT spending." Kavanaugh said that due to the uncertain economic environment, clients continue to tighten their spending.

RedHat's revenue grew by 9%, which is a relatively slow period for the company that used to see quarterly jumps of over 20%. Excluding certain items, the company's earnings per share were $1.68.

HashiCorp's revenue for the most recent fiscal year ending in January increased by 22% to $583 million. Jason Ader, an analyst at William Blair, wrote: "Due to slowing sales execution and cloud migration pace, the company has recently faced challenges." "As part of IBM, HashiCorp will benefit from more standardized sales approaches and better tool bundling capabilities, thereby increasing the value of paid subscriptions."