Key Metrics
- Software Revenue: $6,524 million (9.7% yoy)
- Gross Margin: 83.2%
- Constant Currency Revenue Growth: 9.7%
- Consulting Revenue: $5,152 million (-0.5% yoy)
- Gross Margin: 28.4%
- Constant Currency Revenue Growth: (0.5)%
- Infrastructure Revenue: $3,042 million (-7.0% yoy)
- Gross Margin: 55.0%
- Constant Currency Revenue Growth: (7.0)%
- Financing Revenue: $181 million (-2.5% yoy)
- Gross Margin: 47.2%
- Constant Currency Revenue Growth: (2.5)%
- Other Revenue: $68 million
- Non-GAAP Gross Margin: 57.5%
- Non-GAAP Pre-Tax Margin: 16.6%
- Free Cash Flow: $2.1 billion (Increased by $0.4 billion yoy)
- Total Revenue: $14,968 million (1.5% yoy)
- Total Gross Margin: 56.3% (1.9 points yoy)
Forward guidance
- Fourth Quarter Revenue Growth: Expect low double-digit revenue growth for software, led by Red Hat growth in the mid-teens and continued strength in transaction processing.
- Operating Pretax Margin Expansion: Raising expectation for operating pretax margin expansion to about 1 point year-over-year, driven by revenue scale and productivity initiatives.
- Free Cash Flow Guidance: Confident in delivering greater than $12 billion of free cash flow for the year, primarily driven by growth in adjusted EBITDA.
- Software Segment Profit Margin: Expect software segment profit margin to expand by well over 1 point for the year.
- Infrastructure Impact: Anticipate infrastructure to have about a 1 point impact on IBM's overall revenue growth for the full year.
- Operating Tax Rate: Maintaining full year view of operating tax rate in the mid-teens range.
- Annual Run Rate Savings: Achieving approximately $3.5 billion in annual run rate savings by the end of 2024, up from previous guidance of $3 billion.
Key takeaways
- Positives:
- Arvind Krishna noted, "Technology spending remains strong," indicating robust demand for IBM's offerings, particularly in software and AI, which is crucial for future growth.
- Software revenue grew 10%, with Red Hat contributing 14%, showcasing successful portfolio repositioning towards higher-margin, high-growth areas.
- The generative AI book of business exceeded $3 billion, with a significant increase of over $1 billion quarter-over-quarter, positioning IBM as a leader in this emerging market.
- Strong operating profitability and free cash flow generation, with $6.6 billion year-to-date, reflects effective cost management and operational efficiency.
- Krishna expressed confidence in 2025 growth, citing "significant opportunities" in software and AI, supported by a healthy pipeline and strategic acquisitions.
- Negatives:
- Consulting revenue was flat, impacted by a pause in discretionary spending due to macroeconomic uncertainties, which Krishna acknowledged as a challenge.
- Infrastructure revenue declined 7%, attributed to product cycle dynamics, particularly in the mainframe segment, which has seen a prolonged downturn.
- Kavanaugh highlighted that consulting signings have been negative for two consecutive quarters, raising concerns about future revenue growth in this segment.
- The consulting market is experiencing a shift, with AI projects cannibalizing traditional consulting revenue, leading to lower yields and longer project durations.
- Despite positive signs in software, Krishna noted that consulting growth may be modest in the first half of 2025, indicating potential delays in recovery.
Peer Summary
- Consulting Revenue Trends: Accenture noted a "challenging market environment," with potential headwinds in client spending, while Cognizant highlighted flat bookings year-over-year, indicating difficulties in maintaining growth momentum. This aligns with IBM's flat consulting revenue, suggesting a broader sector trend of cautious client spending.
- Discretionary Spending Concerns: Accenture's guidance reflects a cautious revenue growth forecast, with the lower end assuming "further deterioration in the discretionary spend environment." Cognizant also acknowledged clients focusing on "doing more for less," which could pressure pricing and margins, mirroring IBM's challenges in consulting.
- AI and Technology Investments: Accenture's significant investment in GenAI and Cognizant's $1 billion in AI initiatives indicate a sector-wide pivot towards AI, which may impact traditional consulting revenue streams, as noted by IBM's concerns about AI projects cannibalizing traditional consulting revenue.
- Market Resilience: Gartner's Gene Hall stated, "Gartner continues to remain resilient in a complex environment," suggesting that while challenges exist, there is still demand for consulting services, contrasting with IBM's mixed performance in consulting and infrastructure.
