IBM Sees Modest Annual Sales Growth on Strong Second Half

(Bloomberg) — International Business Machines Corp. gave a forecast for annual revenue in line with analysts’ projections, delivering a cautiously optimistic signal about technology spending in an uncertain economy.

Most Read from Bloomberg

Sales will increase from 3% to 5% in 2023, the company said Wednesday in a statement, meeting analysts’ estimates. The company affirmed a previous free cash flow forecast of $10.5 billion for the year.

IBM reported first-quarter revenue of $14.3 billion, little changed from the period a year earlier and slightly below analysts’ average estimate. Profit, excluding some items, was $1.36 a share in the quarter ended March 31. Analysts projected $1.25 a share, according to data compiled by Bloomberg.

“We’re seeing some softening going into the end of the first half,” Chief Executive Officer Arvind Krishna said in an interview. “Then I do think that growth will get a bit better near the end of the year.”

Shares gained about 1.6% in extended trading after closing at $126.32 in New York. The stock declined 10% this year through Wednesday while many other tech names have rallied.

IBM’s results suggest the company’s large portfolio of software products and services is helping to offset some of the slowdown in the broader economy, wrote Bloomberg Intelligence analyst Anurag Rana. The stronger margins and performance of the software business helped overcome conservative expectations, Kyle McNealy, an analyst at Jefferies, wrote in a note.

Krishna has worked to reorient the century-old company around higher margin services like hybrid cloud computing. Software sales in the quarter increased 2.6% to $5.9 billion, although growth at the Red Hat unit was 8% — the smallest increase since the business was acquired by IBM in 2019 for about $33 billion. Krishna said a new normal range for Red Hat is closer to 11%-13% growth.

Consulting sales gained 2.8% to $5 billion, but the pace of such deals slowed in the Americas region and may spread elsewhere, Krishna said. Customers aren’t yet canceling projects, just delaying them, he said.

Reducing Expenses

The Armonk, New York-based company topped profit estimates in part due to expense management and productivity measures taken earlier in the year, Krishna said. Job cuts may be closer to 5,000 once finished, rather than the previously announced 3,900, he said. Still, IBM hired 7,000 people in the first quarter, he added.

New productivity and efficiency steps are expected to drive $2 billion a year in savings by the end of 2024, Chief Financial Officer James Kavanaugh said on a conference call after the results were released.

Divestitures have been a core part of IBM’s transformation plan, including recent spinoffs of Kyndryl Holdings Inc. and part of the Watson Health business. It is currently considering selling its weather unit.

Separately, GlobalFoundries Inc., which took over IBM’s semiconductor business in 2015, sued Wednesday, alleging that IBM continued to monetize intellectual property from that business unit after the completion of the deal.

(Updates with comments from analysts in the sixth paragraph.)