Release Date: July 24, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- International Business Machines Corp (IBM, Financial) delivered a strong quarter, exceeding expectations in revenue growth, profitability, and cash flow generation.
- The company reported 15.8 billion in revenue and a 17% increase in operating pretax income, highlighting strong execution.
- Software revenue grew by 8%, driven by solid growth across hybrid platform and solutions, and transaction processing.
- Infrastructure revenue was up 3%, with IBM Z and distributed infrastructure showing strong performance.
- IBM raised its expectations for free cash flow to greater than $12 billion for the year, reflecting confidence in its financial performance.
Negative Points
- Consulting revenue growth was only 2%, impacted by a pullback in discretionary spending.
- Despite strong performance in software and infrastructure, consulting remains below the model, reflecting ongoing challenges.
- The macroeconomic environment, including factors like interest rates and inflation, continues to impact decision-making and discretionary spending.
- IBM's consulting segment faced continued pressure on spending related to discretionary projects, leading to a more conservative growth outlook.
- The geopolitical uncertainty and prolonged inflation have created a challenging environment, affecting client spending and project prioritization.
Q & A Highlights
Q: Your long-term model on transaction processing is low single digit, and you posted a very strong quarter with 13% growth. How should we think about that trajectory for 2024 and 2025? Was there anything unusually large within that mix?
A: (James Kavanaugh, CFO) We continue to be very pleased with our transaction processing performance. We've shifted this to a growth contributor, capitalizing on the strength of our mainframe cycle. Our mix over the last few programs is up threefold, and over 80% of our clients are growing on the mainframe. We are confident in continuing this growth, especially with new capabilities like Watson X Code Assistant for Z.
Q: How do you think about AI signings and whether they are incremental or a shift in client spending? Given the strong signings, why are you lowering your consulting expectations for the year?
A: (Arvind Krishna, CEO) The bulk of the demand for AI is indeed a share shift from other areas of consulting. We don't believe it's cannibalistic. Over time, as clients move from early experimentation to scaling AI, we believe it will become accretive. (James Kavanaugh, CFO) Our consulting business is establishing IBM as the strategic provider of choice for enterprises undergoing Digital Transformation 2.0 with AI. This is crucial for long-term growth.
Q: On the consulting side, with low single-digit growth expected for 2024, do you think the demand for AI consulting fees will worsen in H2 versus H1? What is your sense on the duration of this weakness in consulting?
A: (Arvind Krishna, CEO) We do not believe there is a secular trend around weakness; it's temporal due to geopolitical uncertainty and prolonged inflation. We are optimistic about the medium and long-term vector for consulting. (James Kavanaugh, CFO) We are seeing a reprioritization of spending decisions by clients, but we are focused on becoming the strategic provider of choice in AI, which will provide future revenue growth.
Q: Can you talk about the environment for M&A and your intention to continue acquisitions? Do you have sufficient scale in open source and DevOps software?
A: (Arvind Krishna, CEO) Our M&A strategy remains disciplined and focused on hybrid cloud and AI. Valuations are more reasonable than in late 2020 and 2021. We remain in the market for M&A as it is an important part of our growth methodology. We have a strong balance sheet to support this.
Q: Can you dig into the Red Hat business? Despite strong bookings growth, revenue growth decelerated. What are you seeing with Red Hat today?
A: (Arvind Krishna, CEO) Red Hat's bookings are a signal of future demand, translating into revenue over time due to its consumption-based model. We expect low double-digit growth for Red Hat, driven by strong demand for OpenShift, Linux, and Ansible. We are also excited about our open-source AI projects within Red Hat, which will contribute to future growth.
Q: Can you give more color on the decision to open source the Granite models and code base? What makes you feel this is the right long-term strategy?
A: (Arvind Krishna, CEO) Open sourcing our models under the Apache license gives clients the freedom to customize and refine models without giving away their data. This strategy allows us to tap into the developer ecosystem, enabling them to experiment and innovate. We believe this approach will expand our market and drive long-term growth.
Q: With the margin progress being sustainable, do you anticipate flowing through the $0.25 upside on the EPS line? Any more info on the Hoshin Corp. acquisition?
A: (James Kavanaugh, CFO) We are pleased with our strong start to the year, driven by the fundamentals of our business. The Hoshin Corp. acquisition has a compelling strategic fit and attractive financial profile. We expect it to be accretive to adjusted EBIT and free cash flow within 12 to 24 months.
Q: Can you discuss the consulting business's growth expectations for the back half of the year?
A: (James Kavanaugh, CFO) We expect continued pressure on discretionary spending in consulting. However, our strategic focus on large-scale transformations and AI positions us well for long-term growth. We are confident in our ability to navigate the current environment and drive future revenue growth.
Q: Can you elaborate on the strategic partnerships and their impact on your business?
A: (Arvind Krishna, CEO) Our strategic partnerships with industry leaders like Adobe, AWS, Microsoft, and others are crucial for driving innovation and growth. These partnerships enhance our capabilities and expand our reach, positioning us as a leader in hybrid cloud and AI.
Q: What are the key drivers for your software segment's growth?
A: (James Kavanaugh, CFO) Software growth is driven by strong demand for our hybrid cloud and AI platforms, recurring revenue base, and new innovations like Watson X. We are also seeing positive contributions from recent acquisitions, which are accelerating our growth and expanding our capabilities.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
