Release Date: October 23, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- International Business Machines Corp (IBM, Financial) reported double-digit revenue growth in its software segment, driven by strong performance in Red Hat and transaction processing.
- The company achieved the highest levels of cash generation in the first nine months in many years, indicating strong operational efficiency.
- IBM's AI-related business has grown significantly, with a book of business over $3 billion, highlighting its leadership position in the AI market.
- The software segment profit margin was approximately 30%, reflecting strong profitability in this area.
- IBM's strategic focus on hybrid cloud and AI is paying off, with software now comprising nearly 45% of total revenue, up from the high 20s in 2018.
Negative Points
- Consulting revenue was flat and at the lower end of expectations, impacted by economic uncertainty and a pause in discretionary spending.
- Infrastructure revenue declined by 7%, reflecting product cycle dynamics and challenges in the market.
- The consulting market remains dynamic, with clients reprioritizing spending, which has led to a decline in overall signings for the second consecutive quarter.
- Currency fluctuations are expected to be a headwind, with a 0.5 point impact on revenue growth in the fourth quarter.
- Despite strong software growth, the overall revenue growth for the quarter was only 2% at constant currency, indicating mixed performance across segments.
Q & A Highlights
Q: Arvind, how does IBM plan to achieve upward inflection in growth for 2025, particularly in Software and Consulting?
A: Arvind Krishna, CEO, explained that IBM expects significant growth in Software driven by Red Hat's performance, traction in Gen AI products, and automation suite. Consulting is expected to see positive growth due to a strong book of business with hyperscalers and ISV partners, despite current macroeconomic challenges. Infrastructure is also anticipated to contribute positively by mid-2025.
Q: Toni Sacconaghi asked about IBM's growth consistency and the potential for consulting signings to improve.
A: Arvind Krishna acknowledged past growth challenges but highlighted the strategic repositioning of IBM's portfolio. He emphasized the organic growth in Software and the potential for Consulting to become a growth driver, particularly as Gen AI projects transition from signings to revenue.
Q: Wamsi Mohan inquired about the dynamics in Consulting and profit margin expectations for the fourth quarter.
A: CFO Jim Kavanaugh noted that while the consulting market is dynamic, IBM is focused on establishing itself as a strategic provider in Gen AI. He highlighted the strong start in building a Gen AI book of business and the expectation of continued profit margin expansion driven by productivity initiatives and a high-value portfolio mix.
Q: Ben Reitzes asked about the potential for high single-digit growth in free cash flow in 2025.
A: Jim Kavanaugh expressed confidence in IBM's ability to grow free cash flow faster than revenue, driven by operating leverage and strategic acquisitions like HashiCorp. He emphasized IBM's progress in transitioning to a higher-margin business model.
Q: Jim Schneider questioned the rate at which consulting signings translate into revenue and IBM's M&A strategy.
A: Jim Kavanaugh explained that Gen AI projects have longer durations and lower immediate revenue yields but are expected to drive growth in 2025. Arvind Krishna outlined IBM's M&A focus on hybrid cloud, automation, and data and AI, emphasizing synergy with IBM's existing strategy.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
