IBM earnings top estimates as margins expand

IBM issued stronger-than-expected first-quarter earnings on Wednesday even as the technology and consulting company reported disappointing revenue.

Here’s how the company did:

• Earnings: $1.36 per share, adjusted, vs. $1.26 per share as expected by analysts, according to Refinitiv.
• Revenue: $14.25 billion, vs. $14.35 billion as expected by analysts, according to Refinitiv.

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IBM’s revenue increased 0.4% from a year earlier in the quarter, according to a statement. Net income rose 26% to $927 million, or $1.02 a share, for continuing operations.

Profit rose faster than revenue as IBM’s total expenses and other income declined 4% to $6.45 billion, with reductions coming in research, development and engineering. IBM has taken steps to operate more efficiently, including by optimizing its infrastructure and application environment and adopting IBM Red Hat OpenShift software, finance chief Jim Kavanaugh said on a conference call with analysts. “We continue to evaluate additional actions,” he said.

Net income was about $260 million lower because of changes in the company’s portfolio. Last year, IBM said it was selling health-care data and analytics assets to Francisco Partners.

Revenue in the company’s software segment rose about 3% to $5.92 billion year over year, higher than the $5.83 billion consensus among analysts polled by StreetAccount.

IBM’s consulting unit delivered $4.96 billion in revenue, up almost 3% compared to the year-earlier period, but lower than the StreetAccount consensus of $5.01 billion.

“We are seeing some deceleration in consulting from the previous robust growth levels, especially in the United States,” CEO Arvind Krishna said on Wednesday’s call, adding later that clients are delaying rather than canceling engagements. They are keen on lowering their costs, Kavanaugh said.

Sales in the infrastructure segment, which includes IBM’s mainframes, fell 4% to $3.1 billion, trailing the $3.19 billion StreetAccount consensus. Declines came in the distributed infrastructure and infrastructure support categories, even as sales of Z mainframe computer systems increased by 7% following the release in May of the Z16 model.

Gross margins for the software, consulting and infrastructure divisions all widened year over year.

In terms of guidance, IBM called for full-year revenue growth of 3% to 5% in constant currency. Kavanaugh said three months ago that “as we enter this year, I think it’s prudent to expect the low end of the mid-single-digit model.” IBM maintained guidance for $10.5 billion in 2023 free cash flow.

During the quarter, IBM said its technology was behind artificial intelligence-powered commentary on videos in the Masters Tournament golf app. In recent months, following the launch of startup OpenAI’s ChatGPT chatbot, several technology companies have sought to showcase their generative AI capabilities for creating images, text and videos.

“AI techniques such as foundation models, large language models and generative AI give businesses the ability to create 100 AI models from a single dataset,” Krishna said. “Early client engagements experience a 70% faster time to value. That is why we are seeing a lot more interest from business in using AI to boost productivity and reduce cost.” He said IBM was working with Citi to use AI for auditing and compliance.

The shares rose as much as 4% in extended trading. Prior to the move, IBM stock was down about 11% year to date, underperforming the S&P 500, which has climbed 8% over the same period.

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