Six months after IBM spent $34 billion to acquire an open source software company, IBM's Q4 results showed that 'Red Hat goodness is kicking in' (IBM)

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Just six months after IBM bought Red Hat for $34 billion, it looks like the acquisition is paying off for the tech giant.
"It appears that the Red Hat 'goodness' is kicking in," analyst Patrick Moorhead told Business Insider.
The company reported better-than-expected results, boosted by Red Hat revenues. IBM shares rallied more than 4% in after-hours trading.
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It looks like Red Hat is turning out to be a really smart buy for IBM.

The tech giant's shares rallied late Tuesday after posting strong results on robust Red Hat numbers.

IBM said Red Hat revenue exceeded $1 billion in the quarter, up 24% year over year. IBM itself posted a modest revenue gain, which exceeded Wall Street's expectations.

"We're off to a great start with Red Hat," IBM Chief Financial Officer James Kavanaugh said on a call with analysts on Tuesday.

Clearly, Red Hat was a factor for this, analysts said.

"It appears that the Red Hat 'goodness' is kicking in," analyst Patrick Moorhead told Business Insider. IBM also got a boost from sales of its flagship mainframe products, which Moorhead attributed to "pent up demand."

The earnings results are good news for a tech behemoth which has repeatedly posted slumping revenues as it struggled to adapt to the rise of the cloud. IBM dominated the enterprise market by selling hardware and software that businesses used to set up and run their in-house data centers.

Like other traditional tech companies, it has had a hard time adapting to the cloud, which allows businesses to set up networks on web-based platforms run by the likes of Amazon, Microsoft and Google.

IBM has said it's banking on a new trend called hybrid cloud, in which businesses run networks in the cloud, while keeping huge chunks of the data and applications in private data centers.

IBM sees a $1 trillion market that it reckons it can dominate

The company says it expects hybrid cloud to grow into a $1 trillion market that Big Blue will dominate. Buying Red Hat for $34 billion was part of that game plan.

The IBM report shows that the tech giant may be on the right track.

The company's results shows that the tech giant is making "good progress" in its bid to be a stronger player in the cloud era, IDC President Crawford Del Prete told Business Insider.

Tim Bajarin of Creative Strategies Inc said the report "confirms that their purchase of Red Hat and their commitment to the cloud, AI and and investments in R&D are paying off for them."

"They appear to be on much better footing over last year at this time and given the direction they are headed," he told Business Insider. "it is very possible that their growth will continue into the new year."

Moorhead agreed saying: "I can see in a quarter or two that IBM gets back to overall growth. It has one of the better cloud value propositions, and what appears to be a growing Red Hat asset."

Not all analysts were impressed. Marty Wolf, president of Martinwolf M&A Advisors, said, "Expectations were so low that a nominal revenue beat of $150 million is causing speculators to do gymnastics after hours."

The "trend line" for the company still points to "revenue decline," he told Business Insider.

IBM reported a fourth-quarter profit of $3.67 billion, or $4.11 a share, compared to $1.95 billion, or $2.15 a share, for the year-ago quarter. Adjusted profit was $4.71 a share. Revenue edged higher to $21.78 billion from $21.76 billion.

Analysts were expecting the company to report earnings of $4.68 a share on revenue of $21.64 billion.

IBM's stock was up more than 4% in after-hours trades.

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