IBM Posts Mixed Quarter as Consulting Arm Faces Economic Pressure

In an interview with Barron’s, CEO Arvind Krishna also laid out thoughts on how the company can benefit from the rise of artificial intelligence even as

Alphabet

(ticker: GOOGL) and

Microsoft

(MSFT) take more publicly visible positions in that new area.

For the first quarter, IBM (IBM) posted revenue of $14.25 billion, up 0.4% from a year earlier, or 4.4% adjusted for currency, leaving the total about $100 million shy of the Wall Street consensus call for $14.35 billion. 

On an adjusted basis, profits were $1.36 a share, beating the Wall Street consensus by 10 cents a share, aided by strong cost controls. Under generally accepted accounting principles, the company earned $1.02 a share. Free cash flow was $1.3 billion, ahead of the Wall Street consensus estimate at $870 million, as tracked by FactSet.

Each of IBM’s primary business segments performed about in line with analyst forecasts. Software revenue was $5.9 billion, up 2.6%, and a touch ahead of what analysts had expected, with 8% growth at the company’s Red Hat unit. Consulting revenue was $5 billion, up 2.8%, or 8.2% adjusted for currency, in line with expectations.

Revenue from the company’s infrastructure segment, which includes mainframe computers, was $3.1 billion, down 3.7%, and a little shy of estimates. The decline reflected the fact that the year-earlier result was boosted by the launch of a new generation of mainframe computers a year ago.

IBM said it expects full-year revenue to be up between 3% and 5% in constant currency, but noted that at current exchange rates, currency should be neutral to revenue growth for the year. The Street consensus called for 3.6% revenue growth for the year.

IBM reiterated its forecast for $10.5 billion in free cash flow for the year, which would be up from $9.3 billion in 2022.

IBM’s longstanding revenue growth forecast is for mid-single digit growth, and last quarter the company had said results for the full year would be in line with that model. The current forecast, slightly revised, is a bit more conservative.

Krishna, the CEO, told Barron’s that the forecast reflects his anticipation that consulting revenue will slow to the 6% to 8% range, but he has no similar worries about the company’s software arm. 

Krishna noted that there is some “credit tightening happening,” spurring some customers to get more cautious on variable spending, “which is usually consulting.” But he said that given the company’s efforts to control costs, he remains confident on the full year cash-flow forecast. “There’s been a little bit more slowdown on consulting in North America than I would have expected six months ago,” he said.

Asked about a Wall Street Journal report that IBM is looking to sell Weather.com and related assets, Krishna declined to comment directly, but he did say that the company continues to be focused on its work on hybrid clouds and artificial intelligence, and that IBM is “always looking to optimize what we have.” He pointed out that the company has made other moves to trim noncore businesses, such as the sale last year of Watson Health.

As for artificial intelligence, Krishna conceded that IBM isn’t being discussed in the same breath as Alphabet and Microsoft, both of which have launched high-profile generative-AI-based chatbots. He noted that unlike those two companies, IBM isn’t developing consumer-facing AI products.

Krisha thinks the public has discovered AI in the same way they became more aware of the internet following the launch of the Netscape browser in 1994. “What ChatGPT 3 did was like the Netscape moment,” he said.

Krishna noted that early adopters at the time Netscape launched had been using the internet for at least a decade before that, but the launch brought the Net to the public’s attention. The real money was made by companies providing software to bring companies online, building out e-commerce, he said, while browsers became a commodity.

Krishna said IBM is developing AI software for four primary use cases—customer care, digital workers, IT operations, and cybersecurity—and that IBM isn’t really seeing Microsoft or Alphabet playing in any of those areas so far.

Asked about much of the company’s overall revenue is from AU, Krishna said it would be hard to say. He noted that for many AI projects, the first 80% of the money spent involves organizing data, rather than AI software specifically. And he said that AI is becoming embedded in everything, including AI processors in the company’s mainframes, for instance.

“It’s hard to pin down a specific number.”

Krishna also said that the development of large language models is going to make it much more efficient for companies to use AI software. “We’re finally getting to something that scales for the enterprise,” he says.

IBM shares are down about 11% for the year to date.

Write to Eric J. Savitz at [email protected]