Shares of IBM Corp. were riding around 3% higher in extended trading today after the company reported solid second-quarter financial results that surpassed analysts’ expectations, driven by increased artificial intelligence spending by its largest enterprise customers.

The company reported earnings before certain costs such as stock compensation of $2.43 per share, comfortably ahead of analysts’ consensus forecast of $2.20 per share. Revenue for the period rose 2%, to $15.77 billion, easily beating the Street’s target of $15.62 billion.

All told, IBM showed a net profit of $1.83 billion, rising from the $1.58 billion profit it posted a year earlier.

IBM Chief Executive Arvind Krishna (pictured) said in a statement that the company’s book of business for generative AI has grown to more than $2 billion, boosted by the launch of its watsonx development platform one year ago.

“Given our first-half results, we are raising our full-year view of free cash flow, which we now expect to be more than $12 billion,” Krishna said. Three months earlier, during its previous earnings call, the company said it was expecting free cash flow of more or less $12 billion by the end of the year. “We remain confident in the positive macro outlook for technology spending,” Krishna told analysts on a conference call.

In recent months, IBM has focused on expanding the watsonx platform that enables companies to build and deploy AI chatbots and enhance the code for other AI programs. In addition, it recently open-sourced its Granite family of large language models in an effort to popularize some of its other AI services.

Tejas Dessai, a research analyst at Global X, told Reuters that the “commercialization of generative AI is accelerating, positioning diversified enterprise technology companies like IBM to capitalize on the growing demand for AI integration”

Krishna told analysts on the call that the company continues to suffer from the impact of higher interest rates and inflation, explaining that the “geopolitical uncertainty” caused by conflict in Ukraine and Israel has gone on for longer than many people had expected.

“That weighs into people’s heads, about what that might happen, and specifically the war in Europe, as well as the war in the Middle East,” Krishna said.

IBM’s main business units continued to tick over nicely though, despite the uncertainty elsewhere in the world. The company reported revenue of $6.74 billion in its software business, up 7% from a year ago and ahead of the Street’s forecast of $6.49 billion.

Within that segment, Red Hat posted growth of 7%, which was another relatively slow quarter for the acquired software business that was once consistently growing at more than 20% per quarter. However, Krishna said bookings for Red Hat increased in the quarter, a promising sign for the remainder of the year.

IBM’s consulting unit bagged $5.18 billion in revenue, down 1% from a year earlier and just below the Street’s target of $5.23 billion. Meanwhile, the infrastructure segment, which includes IBM’s iconic mainframe computers, generated $3.65 billion in sales, up 0.8% and ahead of the Street’s consensus estimate of $5.31 billion. IBM Chief Financial Officer Jim Kavanaugh said on the call that the current-generation z16 mainframe computer continued to outperform previous sales cycles.

The growing importance of IBM’s software business is the culmination of a years-long transition that saw it pivot from being a legacy hardware company to one that’s focused on high-growth software and services. IBM has been making efforts to accelerate that transition, and in April it announced plans to buy the “infrastructure-as-code” software giant HashiCorp Inc. for $6.4 billion.

In an update last week, HashiCorp revealed that regulators have requested more information about the planned acquisition. That suggests the transaction approval process could be delayed by increased regulatory scrutiny, though there has been no indication of opposition to the deal so far. Krishna told analysts that he remains “quite confident” the deal will close before the calendar year is out.

During the quarter, IBM also announced a new partnership with Palo Alto Networks Inc. The security firm will acquire IBM’s QRadar software-as-a-service assets and become IBM’s preferred cybersecurity partner across network, cloud and security operations, it said.

Prior to today’s gains, IBM’s stock was up 14% in the year to date, more or less in line with the broader S&P 500 index.

Photo: SiliconANGLE