IBM (IBM +3%) is trading higher after a significant EPS beat in Q2, marking its largest upside since 4Q20. Revenue increased modestly by 1.9% year-over-year to $15.77 billion, surpassing expectations. IBM also raised its FY24 free cash flow guidance to above $12 billion and reaffirmed its FY24 constant currency (CC) revenue growth in line with its mid-single-digit model. The company posted strong results in Software and Infrastructure, while Consulting showed some softness.
- Software growth accelerated by 8.4% CC to $6.7 billion, with gains in both Hybrid Platform & Solutions (+6% CC) and Transaction Processing (+13% CC). Clients are leveraging IBM's AI and hybrid cloud platforms. Red Hat annual bookings grew over 20% in Q2, with OpenShift annual bookings up over 40%.
- Infrastructure saw a strong performance with CC revenue up 2.7% year-over-year to $3.6 billion. Demand for IBM's hardware platforms, especially IBM Z, remains strong. IBM noted that the z16 cycle continues to outperform previous cycles as clients face increasing workload demands.
- Consulting revenue was up just 1.8% CC to $5.2 billion but down 0.9% in actual dollars. Clients are pulling back on discretionary projects, prioritizing spending due to higher rates and inflation. However, IBM's generative AI business has reached over $2 billion, with about three-quarters of that in Consulting signings.
- IBM introduced Watsonx and its generative AI strategy a year ago, infusing AI across its business. In Software, automation products like Apptio and watsonx Orchestrate are leveraging AI. IBM Z in Infrastructure is equipped with real-time AI inferencing capabilities, and in Consulting, IBM experts are helping clients design and implement AI strategies.
After a gap down following its Q1 report in April, IBM bounced back with a strong EPS beat in Q2, despite softness in its Consulting segment. Robust technology spending was evident in IBM's Software segment. Higher rates and inflation are causing some clients to reduce Consulting spend. However, IBM's raised free cash flow guidance and positive outlook on AI spending bode well for other tech names as earnings season progresses.
