IBM Corp. met analysts’ revenue estimates in the fourth quarter, but IBM stock surged nearly 9% in after-hours trading as investors focused on profit and a strong 2025 forecast.

Revenue rose 2% on a constant currency bases, to $17.56 billion, in line with consensus estimates. Adjusted earnings per share of $3.92 solidly beat estimates of $3.78.

Chief Executive Arvind Krishna (pictured) issued a bullish forecast for the coming year, saying revenue growth should exceed 5%, with free cash flow growing even faster, to about $13 billion.

IBM attributed the strong results in part to the performance of its Red Hat subsidiary, which grew 17% in the quarter and is on track to contribute $3 billion in revenue for the year. Red Hat’s OpenShift Kubernetes platform is responsible for almost half of those sales. Executives also said the company’s artificial intelligence business is growing strongly with bookings now standing at more than $5 billion, up nearly $2 billion quarter-over-quarter.

Chief Financial Officer James Kavanaugh said generative AI will “be a long-term future vector of growth for consulting that has a multiplier effect that will drag along our software component.”

On a segment basis, software revenue rose 11% at constant currency rates, consulting revenue fell 1% and infrastructure revenue fell 6%, reflecting the approaching end-of-life of the z16 mainframe, whose sales were down 20%. The z17 successor is expected to launch midyear.

The decline in the consulting business was unexpected but Kavanaugh said it’s likely temporary. “We concluded the year with our highest-ever recorded signings quarter, up 23%,” he said. “We’re still dealing with a very dynamic environment around how clients prioritize spending.”

Software strategy

Executives said the results validated the company’s strategic shift to software and consulting along with efforts to jettison low-margin businesses. “We have fundamentally repositioned our business to a software-led integrated platform,” Kavanaugh said.

Krishna said software now makes up about 45% of IBM’s business, with an annual run rate of more than $15 billion and double-digit growth. He also believes it is relatively recession-proof. Recounting his recent experiences at the World Economic Forum meetings in Davos, Switzerland, he said, “to a person, everybody believes technology is now essential for helping them grow. The budget they will touch last if there is ever an issue is their software budget.”

Free cash flow of $6.2 billion in the quarter was up $100 million year-over-year and was the “highest reported free cash flow in history,” Kavanaugh said. IBM also posed the “highest level of operating gross margin and pretax margin in years.”

Krishna said the incoming Trump administration’s disdain for regulations could put some wind in IBM’s sales. “We are looking forward to a regulatory environment that is a bit more rational and a bit more pro-competition,” he said. “We think reasonable deals have a very good chance of getting through in a reasonable amount of time and not being held up for years. That means obviously we are going to lean in more.”

In their prepared remarks, executives didn’t address DeepSeek, the Chinese startup that roiled financial markets earlier this week with its claims of a significantly less expensive approach to AI model training. In response to analyst questions, though, Krishna said DeepSeek validated IBM’s approach to AI.

“IBM’s Granite models, designed for specific purposes, are 90% more cost-efficient than larger alternatives,” Krishna said. “We have been very vocal for about a year that smaller models and more reasonable training times are going to be essential for enterprise deployment of large language models. We think that this is incredibly good for our enterprise clients.”

Steve Sosnick, Interactive Brokers LLC’s chief strategist, said IBM’s strategic moves of the last several years are paying off. “The current management has refocused the company,” he said in a Yahoo! Finance Interview. “They never stopped being smart. They never stopped making really good products.”

Photo: IBM