IBM announced plans to acquire cloud-software company HashiCorp for $6.4 billion on Wednesday, a move aimed at creating a comprehensive end-to-end hybrid cloud platform for the AI era. The news came alongside the computing giant's first-quarter earnings report, which showed mixed results, with adjusted earnings per share beating expectations but revenue falling slightly short of estimates.
In after-hours trading, IBM shares fell more than 8% to $167.63, despite the company's progress in offering AI services and its affirmation of full-year guidance for mid-single digit revenue growth and $12 billion in free cash flow for 2024.
"We continue to capitalize on the excitement and demand for enterprise AI from our clients," said IBM Chief Executive Arvind Krishna in the news release. "Our book of business for Watsonx and generative AI again showed strong momentum, growing quarter over quarter, and has now eclipsed one billion dollars since we launched Watsonx in mid-2023."
For the March-ended quarter, IBM reported adjusted earnings of $1.68 per share on sales of $14.46 billion. Analysts had projected adjusted earnings of $1.60 per share on sales of $14.53 billion, according to FactSet. In the same period a year earlier, IBM posted adjusted earnings of $1.36 per share on sales of $14.25 billion.
The acquisition of HashiCorp, which had a market capitalization of about $5 billion before the Wall Street Journal report sent it higher on Tuesday, is expected to complement IBM's previous acquisition of Red Hat in 2019. HashiCorp pioneered open-source software that developers rely on to control cloud infrastructure, and its premium versions of products like Terraform have brought revenue to the company.
"We see multiple drivers of product synergies within IBM and accelerating growth for HashiCorp," said Jim Kavanaugh, IBM's finance chief, on a conference call with analysts. CEO Arvind Krishna added that the combination should result in more clients wanting to talk to IBM.
In terms of segment performance, IBM's software business saw a 5.5% year-over-year increase in sales to $5.9 billion, while consulting revenue remained flat at $5.2 billion. The infrastructure business experienced a slight decline of just under 1% to $3.1 billion.
Prior to the earnings report, IBM stock had gained 13% year-to-date and 46% over the past 12 months. The company's IBD Composite Rating stood at 81 out of a possible 99, and its IBD Relative Strength Rating was 86 out of 99.
Looking ahead, IBM expects the HashiCorp transaction to close by the end of 2024, with the deal being accretive to adjusted earnings before interest, taxes, depreciation, and amortization in the first full year after close, and accretive to free cash flow in the second year after close.
