IBM’s third-quarter earnings report revealed that while its bottom line exceeded analysts’ expectations, its revenue slightly missed projections, leading to a decline in its stock by about 7% by Thursday lunchtime. Despite this setback, IBM’s stock had seen significant growth over the past year, reaching its highest point in a decade, causing higher expectations among investors.
In the consulting segment, IBM continued to experience strong demand for large digital transformation projects, though discretionary project demand remained unstable due to macroeconomic challenges. Consulting revenue remained flat after adjustments for currency, with growth in AI-related bookings offsetting other areas of weakness. CEO Arvind Krishna cited geopolitical concerns, upcoming elections, inflation, and interest rates as factors affecting discretionary spending, describing the situation as temporary but unpredictable in duration.
IBM’s infrastructure business faced a 7% revenue decline year over year for the third quarter, largely because the z16 mainframe is nearing the end of its product cycle. Despite this, the z16 is on target to outsell its predecessors, suggesting a strong mainframe cycle for IBM. The company has introduced the Telum II processor, set to power the next-generation system in 2025, prompting some customers to delay upgrades in anticipation.
In contrast to consulting and infrastructure, IBM’s software sales showed robust growth, resulting in a 2% overall revenue increase. Software revenue surged 10% compared to the previous year, with notable increases in Red Hat, automation, and transaction processing sectors. Software now contributes nearly 45% to IBM’s total revenue, nearly double its share in 2018. The acquisition of Red Hat five years ago significantly propelled this shift, with Red Hat’s revenue doubling since and its OpenShift hybrid cloud platform expanding dramatically.
Additionally, IBM reported booking over $3 billion in generative AI-related business, with $1 billion gained in the third quarter alone. Despite consulting difficulties, AI service demand remains robust. IBM foresees revenue growth accelerating in 2025, anticipating a consulting rebound, a boost from a new mainframe system, and ongoing AI business expansion. The company continues to project at least $12 billion in free cash flow for 2024, suggesting its stock remains reasonably priced given the expected revenue acceleration and AI’s potential as a growth driver. Timothy Green, who holds a position in IBM, notes The Motley Fool recommends the company, following their disclosure policy.
