IBM Reports Mixed Performance, Raising Investor Concerns
NEW YORK: International Business Machines Corp (IBM) has unveiled revenue figures that have underwhelmed in two pivotal software sectors, including the closely monitored Red Hat division. This development has ignited trepidation among investors who regard these segments as crucial to the company’s trajectory of growth.
In the third quarter, sales from the hybrid cloud division, which encompasses Red Hat, experienced a 14% increase. This figure represents a noticeable deceleration from the previous quarter and falls short of analysts’ average projections of 16%.
Moreover, the transaction processing software category, integral for managing commercial data predominantly on IBM’s mainframes, witnessed a slight decline of 1%.
Despite these setbacks, “we feel quite optimistic about the overall growth prospects for Red Hat,” remarked Chief Financial Officer Jim Kavanaugh in a recent interview.
The Red Hat unit plays a vital role in assisting clients with the management of data and applications across diverse computing environments.
This year, IBM’s stock appreciated, buoyed by investor optimism surrounding the software domain, particularly owing to its acquisitions of Red Hat and HashiCorp.
CEO Arvind Krishna has catalyzed efforts for this segment to become IBM’s most significant business arm, especially as the consulting sector has faced headwinds from client apprehensions regarding economic volatility.
For the quarter, total software revenue rose by 10% to US$7.21 billion, aligning with analysts’ estimates.
Nonetheless, the results indicate a deceleration in organic software growth, as noted by Anurag Rana, an analyst at Bloomberg Intelligence.
Investors are likely to pivot their attention towards the subpar outcomes for both Red Hat and transaction processing, asserted Amit Daryanani, an analyst at Evercore ISI.
Forecasts for the fiscal year ending in December indicate that IBM anticipates free cash flow to be approximately US$14 billion, surpassing analyst estimates of US$13.5 billion.
The company also anticipates revenue growth to exceed 5% in constant currency, meeting projections.
Kavanaugh indicated that IBM remains optimistic about “mid-teens growth for Red Hat, albeit at the lower end,” during his conversation with analysts following the earnings report.
In after-hours trading, IBM shares fell roughly 5.5% after closing at US$287.51 in New York. Year-to-date, the stock had appreciated by 31% until that point.
Total sales for the period ending September 30 surged by 9.1% to US$16.3 billion, according to a company announcement.
Profit, adjusted for certain items, registered at US$2.65 per share, exceeding analysts’ average expectation of US$2.41 per share on US$16.1 billion of revenue.
Within its artificial intelligence (AI) segment, IBM reported bookings surpassing US$9.5 billion since mid-2023. This marks an increase from the US$7.5 billion disclosed during the earnings release in July. Approximately 80% of these bookings stem from the consulting arm, with the remainder within the software division.
Kavanaugh noted that a growing proportion of these bookings is now converting into revenue, as clients move their AI initiatives into production. This trend is fostering an “inflection” point in growth for the consulting segment.
Consulting revenue rose by 3.3% to US$5.32 billion in the quarter, slightly exceeding estimates. Infrastructure revenue soared by 17% to US$3.56 billion, driven by successive sales of IBM’s new z17 mainframe server models.
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