UPDATED 20:16 EST / JANUARY 24 2024

AI

Software and consulting anchor strong IBM financial results

A resurgent IBM Corp. reported revenue and earnings in the fourth quarter that beat analyst projections, propelled by accelerating demand for artificial intelligence in general and generative AI in particular.

The company also reaffirmed earlier guidance of 2024 growth in the mid-single digits with particular strength in software and consulting.

“We are the only tech company with a consulting business at scale,” said Chief Financial Officer James Kavanaugh. Chief Executive2 Arvind Krishna said the company will leverage that advantage this year. “In consulting, we’re going to be absolutely focused on taking share,” he said.

Software and consulting represented 75% of IBM’s revenue base, up from 55% in 2020,” Kavanaugh said. “Our stable revenue stream is about half of IBM’s revenue,” he said.

IBM said its watsonx generative AI and data science platform pulls business across its hardware, software and services offerings. “Our AI platform is fuels innovation and leverages other parts of the portfolio,” Krishna said.

“Its book of business for both watsonx and generative AI roughly doubled between Q3 and Q4; in other words, IBM’s AI-related businesses are not just growing but accelerating,” said Charles King, principal analyst at Pund-IT Inc.

Despite the market’s excitement around generative AI, the “product revenue remains a very small piece of IBM’s business, and the amount of AI-related revenue pull-through in 2024 remains to be seen,” said Jordan Berger, analyst at global research firm Third Bridge Group Ltd.

Although it doesn’t generate the headlines of the AI unicorns, IBM’s business is anchored in use cases its customers care about, King said. “Projects like OpenAI’s ChatGPT get the majority of headlines, but enterprises are investing hundreds of millions of dollars in IBM watsonx and other AI platforms and services that measurably improve their businesses,” he said.

Stable footing

Following three years of uncertainty as the company divested low-margin businesses and sought to define a unique value proposition, IBM appears to be on a stable course. Fourth-quarter revenue rose 4.1% from a year earlier, to $17.38 billion, up 3% in constant currency terms and ahead of consensus estimates of $17.29 billion. Earnings of $3.87 per share, excluding nonrecurring items, beat expectations of $3.79.

Software revenue rose 2% on a constant currency basis, to $7.5 billion, led by 7% growth in the Red Hat business. Red Hat annual bookings were up 17%, including double-digit bookings growth across Red Hat Enterprise Linux, OpenShift, and Ansible.

Transaction processing revenue grew 4%, with the zSystems mainframe line showing uncharacteristically strong growth of 8% in a trough year between new product introductions.

“Seven quarters into the product cycle, zSystems performance had outperformed all other cycles,” Kavanaugh said. “Clients are leveraging zSystems for more and more workloads. It remains an enduring platform.”

Consulting strength

Consulting revenue grew 5.5% spread consistently across the business transformation, technology consulting application operations businesses. “We had a very strong year in the marketplace around consulting in 2023,” Kavanaugh said. He said the current 8% backlog of consulting business was “the strongest we’ve been in some time. Based on backlog realization trends we see an acceleration growth path throughout 2024.”

The only weak point was a 6% decline in sales of security products and services in a market that’s growing more than 10% annually. Kavanaugh called the slowdown “an execution gap on security that we have an opportunity to go fix in 2024.”

The operating margin of 60.1% rose from 59.7% a year earlier. Net cash from operating activities, excluding receivables in IBM’s financing division, was $6.3 billion and the free cash flow of $6.1 billion was up $900 million year-over-year. IBM said free cash flow should total $12 billion in 2024 and expects mid- to upper-single-digit growth across all its major lines of business.

For the full year, IBM reported revenue of $61.9 billion, up 3%, with mid-single-digit growth in its software, consulting and infrastructure businesses. It said its continuing profit margin expansion and cash generation contributed to the successful completion of nine acquisitions in 2023 and growth in its hybrid cloud and AI businesses.

Executives said the macroeconomic conditions are favorable. “This is a remarkably resilient economy,” Krishna said. “We see technology as the answer that helps CEOs stay focused against all headwinds of uncertainty.”

IBM shares rose more than 8% in after-hours trading. The stock hit a nine-year high of $174.86 on today and stood at $188 after-hours.

Photo: IBM

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