IBM Corp. (IBM) - Get International Business Machines (IBM) Report shares were indicated sharply higher in pre-market trading Wednesday after the iconic tech firm posted stronger-than-expected fourth quarter earnings and said its recent acquisition of Red Hat Inc. (RHT) - Get Red Hat, Inc. Report would help boost cloud computing sales in 2019.
IBM said adjusted earnings for the three months ending in December came in at $4.87 per share, down 5% from the same period last year but ahead of the Street consensus of $4.82 per share. Group sales were also softer than the prior period, falling 1% to $21.76 billion, but the figure topped estimates and IBM said it sees free cash flow for 2019 of around $12 billion, largely in-line with its tally over the past year.
Cloud computing sales, too, were impressing, rising 12% to $19.2 billion over the whole of 2018, helping build an overall backlog of orders across its businesses to around $116 billion as of the end of last year. Looking ahead, IBM sees 2019 operating earnings of $13.90 per share, but said that figure won't include the impact of its $34 billion takeover of software group Red Hat last October.
"We see the strong bookings Red Hat recently reported as further evidence of clients' confidence in the value," IBM CFO Jim Kavanaugh told investors on a conference call late Tuesday. "Remember, the quarter ended a month after the transaction was announced. From a value perspective, in addition to the growing Red Hat business itself, we see an opportunity to lift all of IBM by selling more of our own IBM Cloud and by selling more of our analytics and AI capabilities on OpenShift across multiple platforms."
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IBM shares jumped 6.7% to $130.69 early Wednesday.
IBM said sales in its Global Business Services division rose 6% on a constant currency basis to $4.3 billlon while gross margins swelled by 300 basis points. Its Cognitiive division saw a 2.2% increase in sales, reversing the 5% decline recorded in the previous quarter, as AI demand began to accelerate.
Technology Services & Cloud Platforms revenues were essentially flat from last year on a constant currency basis at $8.9 billion, with the company citing growth in hybrid cloud revenue.
IBM CEO Ginni Rometty called the October acquisition of Raleigh, North-Carolina-based Red Hat acquisition a "game changer" when she announced the $34 billion deal in October, vowing that "IBM will become the world's #1 hybrid cloud provider, offering companies the only open cloud solution that will unlock the full value of the cloud for their businesses."