(Bloomberg) – International Business Machines Corp. fell about 9% in extended trading after the company’s weak consulting sales disappointed investors and overshadowed its acquisition of software company HashiCorp Inc.
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Revenue rose 1% to $14.5 billion in the first quarter, the Armonk, New York-based company said in a statement Wednesday. IBM also reiterated its previous forecast for free cash flow of $12 billion for the fiscal year ending in December.
Separately, IBM said it 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 it bought software company Red Hat in 2019 for $31.8 billion.
The deal is another move by Chief Executive Officer Arvind Krishna to transform the legacy technology hardware company into one focused on high-growth software and services. Big Blue has made other acquisitions in this space, such as Apptio for $4.6 billion last year, and divested managed infrastructure, weather and healthcare businesses.
“HashiCorp has a proven track record of helping customers navigate the complexities of today’s infrastructure and application proliferation,” 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.”
Shares fell to a low of $166.51 in extended trading after closing at $184.10 in New York. The stock has gained 13% this year, outperforming the S&P 500 Information Technology Sector Index’s 6.2% rally.
Read more: IBM to acquire software maker HashiCorp in $6.4 billion deal
With the HashiCorp acquisition, IBM will adopt the “Red Hat playbook” by making the product available 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 will see HashiCorp’s free cash flow margin rise to 30% to 40% as part of IBM.
According to Krishna, IBM has surpassed $1 billion in bookings for AI-focused products and consulting since mid-2023. That number represents about two-thirds of advice and will largely be recognized as revenue in 2025, Kavanaugh added.
Investors have focused on the potential for a decline in IBM’s consulting division, which is IBM’s second-largest division. Sales for the unit were $5.2 billion in the period ended March 31, flat from the same quarter last year.
The advisory results reflect a “weak IT spending climate,” wrote Anurag Rana, senior analyst at Bloomberg Intelligence. Kavanaugh said customers continue to limit spending due to an uncertain economic environment.
Red Hat posted revenue growth of 9%, another comparatively slow period for a company that once regularly grew more than 20% each quarter. Profit, excluding some items, was $1.68 per share.
HashiCorp reported a 22% increase in revenue 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 slower cloud migrations, wrote Jason Ader, an analyst at William Blair. “As part of IBM, HashiCorp could benefit from a more standardized sales approach and a better ability to bundle tools to increase the value of paid subscriptions,” he wrote.
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