IBM recently reported its third-quarter financial results, revealing a mixed performance across its business segments. The company's overall revenue totaled $14.97 billion, a 1.5% year-over-year increase but fell short of analysts' expectations of $15.07 billion. This shortfall was primarily due to a decline in its consulting business, which saw revenue decrease to $5.15 billion, slightly below expectations of $5.19 billion.
The software division emerged as a bright spot, with revenues hitting $6.52 billion, a 10% increase and above forecasts of $6.37 billion. Notably, IBM's generative AI business has expanded significantly, surpassing $3 billion, up $1 billion from the second quarter. The Red Hat segment, acquired five years ago, contributed a 14% growth to the software business.
Despite a broader industry slowdown, IBM's investment in AI has paid off, as its AI offerings have seen robust growth. The company remains confident in the AI business's growth trajectory, emphasizing that it has reached three-year highs in quarterly revenue growth within this sector. The software division also boasts an impressive gross margin of 83%, the highest among its operations.
Conversely, IBM's infrastructure division reported a 7% revenue decline to $3.04 billion, missing the anticipated $3.24 billion. This downturn is expected to continue as IBM nears the end of its current three-year product cycle. However, the company anticipates a revenue boost with the release of its next-generation hardware in early 2025.
IBM has been transitioning from its legacy computing roots toward a focus on high-growth software and services. This strategy includes acquisitions such as the planned purchase of Hashicorp and the $4.6 billion acquisition of Apptio last year. In the current quarter, IBM announced the expansion of its Oracle product advisory network and acquired Oracle services company Accelalpha. It also sold its QRadar cloud software assets to Palo Alto Networks, while acquiring StreamSets and webMethods from Software AG.
For the fourth quarter, IBM expects revenue growth to remain steady at a constant currency rate, similar to the 2% growth achieved in the third quarter. Despite the post-market drop in IBM share prices, which initially fell 8% and then narrowed to a 3.2% decline, IBM's stock has risen approximately 43% so far this year, outperforming the S&P 500's 21% increase during the same period.
