IBM Earnings Showcase AI and Automation

IBM posted solid earnings yesterday, citing growth in hybrid cloud and AI. But it was in the segment reports that interesting nuggets stood out in a diversity of areas strung together by AI enhancements.

First the financials: Revenues for the quarter came in at $15.8 billion, up 2% year-over-year (y/y). Adjusted net income was $2.3 billion, up 14% y/y. Posted EPS was $2.43, up 11% y/y. Operating gross margin of 57.8% was up 190 basis points y/y. Quarterly net cash from operating activities of $2.1 billion was down $0.6 billion y/y.

Automation Leads in IBM Hybrid Platform

IBM reports financials for four segments: Software, Consulting, Infrastructure, and Financing. And herein lay some interesting results. Software revenues of $6.7 billion were up 7.1% for the quarter, helped by sales of automation software, which was up 15% y/y. (Automation is part of the Software subsegment IBM Hybrid Platform & Solutions.)

During his opening remarks on the earnings call, CEO Arvind Krishna cited cloud cost management (CCM) suite IBM Apptio as boosting the Software segment overall. Recall that IBM purchased Apptio for in August 2023 for a reported $4.6 billion. At the time, Big Blue vowed in its press release to incorporate Apptio’s FinOps platform into the portfolio that includes IBM Turbonomic, AIOps, and Instana to “give clients a ‘virtual command center’ for managing, optimizing and automating technology spending decisions.” Apparently, the addition has paid off. Though CCM and FinOps remain a scattered market of point products, drawing solutions under one IBM umbrella seems to be working.

When speaking of automation last night, CEO Krishna also cited the upcoming integration of IBM’s $6.4-billion splurge on HashiCorp: “The powerful combination of Red Hat Ansible and Terraform will simplify provisioning and configuration of applications across hybrid cloud environments,” he said.

In security software, IBM showed a modest 2% growth, but the anticipated partnership with Palo Alto Networks was a talking point. IBM expects the arrangement to be finalized this quarter. Once done, IBM will migrate its QRadar security suite customers to Palo Alto’s XSIAM platform, which should strengthen its security stance.

IBM's AI Up, Consulting Down

Throughout last night’s earnings call, management cited a $2 billion book of business that has emerged since IBM released its watsonx AI platform in May 2023. About one-quarter of that amount comprises software purchases, while three-quarters is consulting—a potential boost for IBM’s consulting business, which saw revenues of $5.2 billion last quarter, down .9%. IBM blames a customer “pullback in discretionary spending” as enterprises look to prioritize their budgets to accommodate AI.

Management had a lot more to say about AI. “We have infused AI across the business from the tools clients use to manage and optimize their hybrid cloud environments to our platform products …. to infrastructure and consulting, you can find AI innovation in all of our segments,” Krishna said.

Throughout the call, management revealed a handful of interesting AI tidbits, as indicated below:

• IBM is intent on small models as well as large language models. “Choosing the right AI model is crucial for success in scaling AI. While large general-purpose models are great for starting on AI use cases, clients are finding that smaller models are essential for cost-effective AI strategies. Smaller models are also much easier to customize and tune,” Krishna said.
• IBM views Linux as the platform of choice for enterprise servers. “We see … Linux becoming dominant in the enterprise server space, thanks to the speed and innovation offered by open-source,” said CEO Krishna.
• IBM has posted its Granite models under Apache 2.0 licenses on Hugging Face and GitHub. The focus of these models is on helping developers to code AI applications in a range of vertical markets.
• IBM’s AI isn’t just about software. The company’s mainframes are part of the picture: “In transaction processing, we are seeing early momentum in watsonx Code Assistant for Z. In infrastructure, IBM Z is equipped with real-time AI inferencing capabilities,” said Krishna.

In general, IBM has a solid AI message, and it appears that Big Blue is attacking the technological shift in a considered way. The decisions to offload QRadar security to Palo Alto, to shift Granite models to open source, and to add inference capabilities to Z mainframes all speak to an awareness on IBM’s part of its strengths and weaknesses. It will also be interesting to see the company make good on its AI consulting predictions.

Investors seem pleased with the earnings. In midday trading, shares were priced at $190.18, +6.16 (3.35%).

Futuriom Take: IBM’s message was, as expected, all about AI. (Indeed, if any technology firm opens its earnings remarks without a mention of AI, let us know.) IBM has diversified story here, with lots of moving parts. It will be interesting to see how they progress over the next few quarters.