IBM’s revenue beats estimates. The CEO says that technical demand is still strong.
IBM has restructured to focus on software and services related to hybrid cloud computing and artificial intelligence.
David Paul Morris / Bloomberg
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IBM
kicked off the tech earnings season with better-than-expected quarterly results, despite headwinds from the strong dollar.
For the second quarter, IBM (ticker: IBM) had revenue of $ 15.5 billion, up 9% from a year ago, or 16% adjusted for currency. That beat Wall’s Street’s consensus forecast of $ 15.2 billion. Earnings on an adjusted basis were $ 2.31 per share, three cents ahead of analysts’ forecast. Under generally accepted accounting principles, the company earned $ 1.61 per share.
IBM continues to see positive results from its recent restructuring, which has focused the company on software and services related to artificial intelligence and hybrid cloud computing. The company is also at the start of a new product cycle for its mainframe hardware business, which should help support growth in at least the next few quarters.
IBM CEO Arvind Krishna said in an interview on Monday that the company’s growth was balanced across geographical areas in the quarter, with constant currency growth at the highest level in more than a decade, despite the current economic environment.
“We always remain paranoid,” he says. “But demand is quite strong, and on a global basis, technology is the counterweight to higher interest rates and inflation.” He said demand in Europe remained strong, even in Eastern Europe, closer to the front of the Russian war against Ukraine.
He notes that many investors have been concerned that the company’s consulting business in particular may decline in a downturn – that advice is the first thing you cut. But he sees no sign that it is happening. “I’m not so sure that will be true this time,” Krishna said. “Technology is more important to our customers. They need our help and our expertise.”
Looking ahead, Krishna does not expect a recession at the depths of the downturn in 2008/2009, and expects a couple of quarters of 1% to 2% decline in America, with a little more uncertainty in Europe. But he also believes that with the exception of a deeper recession, IBM’s growth rate will not be affected.
IBM said that currency headwinds reduced reported revenues by around $ 900 million, or around $ 200 million more than the company expected based on exchange rates when it last reported quarterly results in April. The constant currency growth includes about five percentage points related to
Kyndryl
,
the managed IT services company that was spun out of IBM last year.
Software revenues in the quarter increased by 6%, or 12% in constant currency, driven by strength in automation, security and Red Hat. Consulting revenues increased by 10%, or 18% in constant currency, while IBM’s infrastructure segment grew by 19%, or 25% in constant currency, reflecting the launch of the new z16 generation of mainframes. On a currency-adjusted basis, software growth slowed from 12.3%, while consulting rose from 17.4%. Krishna noted that the z16 has a strong start, and ahead of the company’s previous expectations.
The company said hybrid cloud revenue over the past 12 months was $ 21.7 billion, up 16% or 19% adjusted for currency.
IBM reiterated its full-year earnings forecast at the high end of the revenue target for mid-digit growth, although the company adjusted the outlook for free cash flow to a single point of $ 10 billion, compared to a previous range of $ 10. billion to $ 10.5 billion. Krishna said the revised cash flow figure reflects $ 200 million related to the shutdown of operations in Russia, cost inflation and currency effects. He notes that IBM has not changed the $ 35 billion forecast in free cash flow for the three years to 2024.
“We are a fast-growing, focused, disciplined company with a solid business foundation,” said IBM CFO James Kavanaugh in a statement. “Our recurring revenue stream and solid cash generation position us well to continue investing in R & D, buying new companies and strengthening our talent in all parts of the business, while returning value to shareholders through our dividends.”
Despite the generally solid figures and positive comments from management, IBM shares fell 4% at the end of trading on Monday.
IBM is up 4% this year, surpassing them
S&P 500
by almost 24 percentage points. IBM shares fell around 1% in Monday’s regular session, to $ 138.43.
Write to Eric J. Savitz at eric.savitz@barrons.com
