Shares of IBM (NYSE: IBM) are trading modestly higher on Thursday after the tech and consulting giant reported better-than-expected earnings for Q1 2023, while revenue missed expectations.
IBM daily chart (Source: TradingView)
IBM posted adjusted earnings per share (EPS) of $1.36, topping the consensus estimates of $1.26 per share, as per data from Refinitiv. Revenue came in at $14.25 billion, falling short of the estimated $14.35 billion.
Year-over-year (YoY), the company’s revenue rose 0.4%, while net income from continuing operations grew 26% to $927 million, or $1.02 per share. IBM’s profit saw faster growth compared to revenue as the company’s total expenses and other income fell by 4% to $6.45 billion, ahead of upcoming reductions in its research, engineering, and development teams.
The Armonk, New York-based company has taken measures to improve its operating efficiency, such as optimizing its infrastructure and application environment. IBM said its net income was around $260 lower due to certain portfolio changes. Last year, the company announced plans to sell its healthcare data and analytics unit to Fransisco Partners.
IBM’s software revenue climbed 3% to $5.92 billion YoY, topping the consensus projection of $5.83 billion. The firm’s sales in the infrastructure branch declined 4% YoY to $3.1 billion, missing the analyst consensus of $3.19 billion.
The drop came from the pressured distributed infrastructure and infrastructure support categories, even though sales of Z mainframe computer systems grew 7% from a year ago. The consulting segment generated $4.96 billion in revenue, up around 3% YoY, though missing the analysts’ expectations of $5.01 billion.
“We are seeing some deceleration in consulting from the previous robust growth levels, especially in the United States,” said CEO Arvind Krishna during the call on Wednesday.
Krishna also said that consulting clients are postponing engagements rather than canceling as they also look to reduce costs. He added that clients were keener on digital transformation projects focused on “cost takeout, productivity, and quick returns.”
Well-Positioned in a Difficult Macro Environment
The IT company reduced its full-year consulting revenue growth outlook to a range of 6% to 8%, from earlier forecasts that implied high single-digit percentage growth. Annual revenue growth is expected to range between 3% and 5% at constant currency, compared to earlier expectations that revenue would climb to the lower end of its mid-single-digit target. This compares to consensus estimates of 3.6% growth, according to Refinitiv data.
The company also reiterated its forecast of $10.5 billion in free cash flow for this year. Meanwhile, analysts think that IBM is better positioned to weather reductions in corporate IT spending.
The tech giant also has low exposure to regional banks in the U.S., meaning it is mainly protected from the ongoing baking turmoil in the country. According to IBM’s CFO James Kavanaugh, regional banks account for less than 1% of the company’s revenue in the US.
IBM’s quarterly report also showed that its gross margins grew across software, consulting, and infrastructure divisions. The report comes as the company ramps up its efforts to position itself as a leader in the red-hot artificial intelligence (AI) sector.
The unprecedented success of OpenAi’s chatbot ChatGPT has left many tech companies scrambling to develop their own generative AI products capable of creating human-like texts, videos, and images.
And while investors are rushing to identify potential stock winners in the AI market, analysts believe that IBM represents a less stressful investment, thanks to its strong AI relevancies, and well-established business.
“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.”
Essentially, any case for AI-related stock investment is based on the rapidly-growing demand for the technology.
According to market data provider Grand View Research, the global AI market is expected to grow at a compound annual growth rate (CAGR) of 37.3% from 2023 to 2030. The sector could command revenue of over $1.81 trillion at the end of the forecast period, from $136.55 billion in 2022.
Moreover, a Forbes report from earlier this year revealed that more than 50% of organizations have plans to incorporate the use of AI and automation technology this year. As a result, major AI and machine learning (ML) projects such as IBM Watson are likely to attract significant interest in the future.
Despite a modestly positive earnings report, IBM’s shares remain down more than 10% since the start of the year, underperforming the broader S&P 500 index, which has advanced 8% over that period. However, the stock looks well-positioned to outperform going forward, especially if the risk-off sentiment starts to dominate from now on.