IBM shares fall after flatlining sales in its second-largest business unit

International Business Machines Corp. dropped about 9% in extended trading after the company’s weak consulting unit sales disappointed investors, overshadowing its acquisition of software firm HashiCorp Inc.

First-quarter sales gained 1% to $14.5 billion, the Armonk, New York-based company said Wednesday in a statement. IBM also reiterated its previous outlook of $12 billion in free cash flow for the fiscal year ending in December.

Separately, IBM announced it has agreed to buy HashiCorp, which sells software that helps companies manage their cloud-computing operations, for an enterprise value of $6.4 billion. The acquisition is IBM’s largest since buying software firm Red Hat in 2019 for $31.8 billion. 

The deal is another move by Chief Executive Officer Arvind Krishna to turn the legacy tech hardware company into one focused on high-growth software and services. Big Blue has made other acquisitions in this area, such as Apptio for $4.6 billion last year, and divested managed infrastructure, weather and health businesses.

“HashiCorp has a proven track record of enabling clients to manage the complexity of today’s infrastructure and application sprawl,” Krishna said in the statement. “Combining IBM’s portfolio and expertise with HashiCorp’s capabilities and talent will create a comprehensive hybrid cloud platform designed for the AI era.”

The shares declined to a low of $166.51 in extended trading after closing at $184.10 in New York. The stock has gained 13% this year, exceeding the S&P 500 Information Technology Sector Index rally of 6.2%. 

With the HashiCorp acquisition, IBM will run the “Red Hat playbook” by pushing the product to its global catalog of customers, Chief Financial Officer Jim Kavanaugh said in an interview. The deal will boost earnings before interest, taxes, depreciation and amortization within the first year, he added, and sees HashiCorp’s free cash flow margin climbing to 30% to 40% as a part of IBM.

IBM has eclipsed $1 billion in bookings for AI-focused products and consulting since mid-2023, Krishna said in the statement. That figure is roughly two-thirds consulting, and will mostly be recognized as revenue in 2025, Kavanaugh added.

Investors have been focused on the potential for slippage in IBM’s consulting division, which is its second largest business. That unit’s revenue was $5.2 billion in the period ended March 31, unchanged from the quarter a year earlier. 

The consulting results reflect a “weak IT spending climate,” wrote Anurag Rana, a senior analyst at Bloomberg Intelligence. Kavanaugh said that clients continue to tighten their spending owing to an uncertain economic environment. 

Red Hat posted sales growth of 9%, another comparatively slow period for a business that once regularly jumped more than 20% each quarter. Profit, excluding some items, was $1.68 a share. 

HashiCorp posted a sales gain of 22% to $583 million in its most recent fiscal year, which ended in January. The company has struggled recently due to a mix of sales execution and slowing cloud migrations, wrote Jason Ader, an analyst at William Blair. “As part of IBM, HashiCorp could benefit from a more standardized sales approach and better ability to bundle tools to drive up the value of paid subscriptions,” he wrote.

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