IBM beats expectations as AI powers software revenue growth

IBM beats expectations as AI powers software revenue growth

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Shares of IBM Corp. gained a percentage point in the after-hours trading session today after the company delivered third quarter financial results that came in just ahead of analyst’s expectations

The company reported earnings before certain costs such as stock compensation of $2.20 per share, coming in ahead of the $2.13 per share forecast. Revenue for the period rose 5% from a year earlier to $14.75 billion, also coming in ahead of the consensus estimate of $14.73 billion.

IBM also reported net income of $1.7 billion for the quarter, swinging to a profit after recording a $3.2 billion loss in the year-ago period, when it was hit by a $5.9 billion pension settlement charge.

The best performance came from IBM’s software business unit, which delivered $6.27 billion in revenue, up 8% from a year earlier and in line with analyst’s consensus estimates. Revenue from IBM’s infrastructure division, which includes its mainframe computers, declined 2% from a year earlier to just $3.27 billion, but that number notably came in ahead of the analyst forecast of just $3.1 billion. As for the consulting division, it generated $4.96 billion in sales, up 6% from a year earlier but below the consensus of $5.11 billion.

IBM Chief Executive Arvind Krishna (pictured) said customers are showing a lot of appreciation for the company’s watsonx artificial intelligence and data platform, along with its hybrid cloud platforms, as they look to achieve greater productivity. “This is helping to drive solid growth in our software and consulting businesses,” he said. “As a result, we remain confident in our revenue and free cash flow expectations for the full year.”

IBM’s miss on consulting was not entirely shocking, as one of its main rivals in that are, Accenture Plc., said last month that revenue from communications, media and technology clients had declined 12% in its most recent quarter.

In an interview with CNBC, IBM Chief Financial Officer Jim Kavanaugh insisted that the company’s consulting business was grabbing market share from its competitors, despite the miss. IBM has stepped up its game in consulting lately, announcing new partnerships with Microsoft Corp. and Amazon Web Services Inc. during that quarter focused on generative AI. IBM is promising to lend its expertise to help cloud customers define and implement their strategies for taking advantage of generative AI’s capabilities.

Despite this, Kavanaugh said many customers remain focused on cost reduction, which puts pressure on discretionary consulting projects.

Still, AI remains a promising bet overall. Within IBM’s software business, revenue from data and AI rose by 6% from a year earlier.

Looking to the next quarter, IBM’s management reiterated its full year guidance, saying it expects revenue growth of between 3% and 5%, with around $10.5 billion in free cash flow, consistent with its previous forecast.

The company announced a number of advances on the AI front during the quarter, releasing its Granite series of hardware-efficient generative AI models within the watsonx platform, which can perform tasks such as summarizing documents, “insight extraction” and text generation. It also announced it will host Meta Platforms Inc.’s open-source Llama 2, a 70-billion-parameter large language model, in the studio, and launched a generative AI code assistant for its mainframe computers.

IBM also acquired Apptio Inc., a provider of AI-based tools for managing cloud costs, for $4.6 billion during the quarter.

Prior to today’s slight gain, IBM’s stock was down around 2% for the year to date, trailing the wider S&P 500 Index, which is up 9% for the year.

Photo: SiliconANGLE

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