IBM Resists Recession Fears, Calls Partners ‘Crucial’ To Strategy

‘When I talk with clients, it’s clear there’s a real opportunity to help businesses leverage technology in today’s environment,’ says IBM Chairman and CEO Arvind Krishna.

IBM Chairman and CEO Arvind Krishna

IBM continued to stay above concerns around a potential recession in the U.S., with IBM Chairman and CEO Arvind Krishna calling partners “a crucial element of our strategy.”

Reporting the Armonk, N.Y.-based tech giant’s performance for the third quarter of IBM’s fiscal year that ended Sept. 30, Krishna said that he expects full-year revenue growth “above our mid-single-digit model.”

He also highlighted growth in a variety of services that involve its partners, including automation and artificial intelligence offerings, its hybrid cloud platform and open-source vendor subsidiary Red Hat, which has its own channel partner program.

“When I talk with clients, it’s clear there’s a real opportunity to help businesses leverage technology in today’s environment,” Krishna said on the call. “Clients are dealing with everything from inflation to demographic shifts, from supply chain bottlenecks to sustainability efforts. By deploying powerful hybrid cloud and AI technologies, IBM is helping businesses seize new opportunities, overcome today’s challenges and emerge stronger.”

[RELATED: IBM CEO Arvind Krishna To Partners: To Win New Clients, ‘We Need Your Help’]

How did IBM do In Q3?

Krishna also gave a rosy view of future demand for IBM’s services, saying that the company has almost no consumer-facing technology for sale—which could be more vulnerable in a recession—and that the company has heavily invested in AI for enterprise productivity.

“I think that that productivity team is going to play out over actually not just this remaining part of this year, but for the next half-decade, maybe the full decade,” Krishna said.

And a key element in IBM’s go-to-market remains partners. Krishna highlighted IBM’s expanded partnership with VMware to make IBM Consulting a global systems integration partner and Red Hat’s partnership with Dell Technologies for managing multi-cloud environments on-premises.

“Our partner ecosystem is a crucial element of our strategy,” Krishna said. “Each quarter, we continue to expand the work we do with partners to serve our joint clients.”

Europe-Only Recession Possible

Sales in the Americas and Asia have stayed strong, Krishna said. European businesses have become more cautious due to inflation and an energy crisis spurred by the Russian invasion of Ukraine.

“You can sense that there is some caution creeping into the conversations [in Europe], albeit not in the data and not yet in what we are doing as business there,” Krishna said. “But we’d be foolish not to prepare. There could be a bit of a downturn in Europe only.”

The CEO’s comments align with the recent positive economic outlook he gave for technology businesses during CRN parent The Channel Company’s 2022 XChange Best of Breed conference in Atlanta.

Krishna and his channel leaders at IBM have maintained that partners are necessary for continuing to grow the 111-year-old company’s customer base.

“I want to increase the number of clients, also, not just wallet share,” Krishna said at BoB. “That means that we need your help. We are not going to go there [after new clients] directly at all.”

IBM Not Immune To Macroeconomics

Foreign exchange rates plagued IBM as they have other vendors this year.

“With the continuing strengthening of the U.S. dollar, currency translation impacted our reported revenue growth by more than 8 points, or nearly $1.1 billion,” IBM CFO Jim Kavanaugh told investors on the call.

IBM Consulting saw its fifth consecutive quarter of double-digit growth with 16 percent growth year over year, bringing in $4.7 billion of revenue.

However, this segment also saw its pre-tax margin shrink year over year to 10 percent due in part to the growing cost of labor.

“As we discussed in prior quarters, consulting is most impacted by the labor cost inflation,” Kavanaugh said. “Those dynamics continue to put pressure on the margin profile. However, coming out of the third quarter, we are seeing signs of progress. Our utilization rates are improving as we exited the quarter. Our acquisitions are scaling and are on a path to margin accretion. And we’ve seen two quarters of price margin improvement year over year that will benefit our margin profile going forward.”

Krishna added that IBM Consulting “is very different than some others” because it helps customers move to not only IBM Cloud, but Amazon Web Services and Microsoft Azure as well—the No. 1 and No. 2 clouds for market share. IBM Consulting also works with SAP, Adobe and other non-IBM properties.

“Even in an inflationary environment, even when the economy is not doing well, these tend to be the projects that stay the course,” Krishna said. “But maybe the signings come in smaller chunks. And as long as we deliver well, then people tend to sign up more and more going forward. And that’s sort of a bit of color of what we’ve seen play out already this year, and we expect that to maybe increase next year.”

IBM’s Q3 Performance

Software and consulting represent more than 70 percent of IBM’s revenue, Kavanaugh said on the call.

In the third quarter, IBM saw total revenue of $14.1 billion, an increase of 15 percent year over year at constant currency. About 5 points came from sales to IBM spinoff Kyndryl.

Kavanaugh said that IBM is “wrapping up payments related to the Kyndryl separation” and that Kyndryl sales adding to IBM’s growth are now “essentially behind us.”

IBM’s software segment—which includes the hybrid cloud platform, hybrid platform services, Red Hat, automation, security, data and artificial intelligence, and transaction processing—brought in $5.8 billion in revenue for the quarter, an increase of 14 percent year over year. About 8 points came from sales to Kyndryl.

Hybrid cloud platform and solutions annual recurring revenue was $13 billion, up about 9 percent, Kavanaugh said.

Red Hat revenue grew 18 percent year over year while automation increased 3 percent. Kavanaugh said that Red Hat continues “to see an increase in large deals as well as strong cross-sell and upsell across Red Hat solutions.”

Data and AI grew 4 percent, with growth in AI operations (AIOps) and management and integration. Security grew 6 percent thanks to increased demand for data security, threat management, Cloud Pak for Security and Guardian Insights. IBM did not break out the dollar amounts for these segments.

Transaction processing was up 33 percent year over year, with 26 points from sales to Kyndryl.

Infrastructure—which includes hybrid infrastructure, IBM z Systems, distributed infrastructure and infrastructure support—saw revenue of $3.4 billion. That was an increase of 23 percent year over year and included about 9 points from sales to Kyndryl.

IBM z Systems sales almost doubled year over year. Kavanaugh credited client adoption of the z16 and LinuxOne server.

Distributed infrastructure was up 21 percent. Kavanaugh credited customer adoption of IBM Power10 servers and flash storage offerings.

Infrastructure support was up 5 percent, with about 7 points from sales to Kyndryl. IBM did not break out exact dollar amounts.

IBM’s consulting segment—which includes application operations, business transformation and technology consulting—saw revenue of $4.7 billion during the quarter, an increase of 16 percent year over year.

Business transformation grew 14 percent year over year while the other two segments grew 17 percent. IBM did not break out exact dollar amounts.

The vendor generated net cash of $1.9 billion for the quarter—$1.2 billion excluding IBM Financing receivables. IBM ended the quarter with $9.7 billion of cash on hand. IBM has total debt of about $50.9 billion, which includes IBM Financing debt of $11.2 billion, according to IBM.

IBM’s stock traded at $126.07 a share after hours, an increase of about 3 percent since market open.