IBM Sees Double-Digit AI, Red Hat Growth In Q2

“AI is a transformative technology that has the potential to unlock tremendous business value …This past quarter, we made strategic moves to bolster our hybrid cloud and AI capabilities,” IBM CEO Arvind Krishna told investors during the company’s 2023 second-quarter earnings call.

IBM’s second quarter 2023 financial results reflect the success that Big Blue is seeing in its hybrid cloud and AI strategy, according to the company’s executives.

IBM CEO Arvind Krishna called hybrid cloud and AI the” two key drivers of business innovation” during the Armonk, N.Y.-based vendor’s earnings call on Wednesday evening.

“AI is a transformative technology that has the potential to unlock tremendous business value,” he said. “This past quarter, we made strategic moves to bolster our hybrid cloud and AI capabilities.”

Krishna spotlighted Watsonx, IBM’s AI and data platform that provides self-service access to partners and businesses so they can build and refine generative AI foundation models and traditional machine-learning systems that the company first unveiled in May.

“To date, the platform has been shaped by more than 150 businesses across industries from telcos to banks. Businesses around the world are excited about tapping foundation models and machine learning in one place with their own data to accelerate generative AI workloads,” he said. “IBM is also working with an expanding ecosystem of partners to co-create and innovate across industries and use cases, from space to sports.”

[Related: New IBM Channel Chief Kate Woolley: We Need To Be ‘More Essential To Our Partners’]

Software Segment As A Bright Spot

IBM’s software segment – which houses hybrid cloud, Red Hat, automation, data, AI and security – was the company’s fastest-growing division. The segment brought in $13.6 billion in revenue, an increase of 8 percent year over year.

“This performance reflects growth across both our recurring revenue base -- which is about 80 percent of annual software revenue -- as well as transactional revenue,” said IBM CFO James Kavanaugh.

Year over year, Red Hat’s revenue grew 11 percent. Automation grew 2 percent. Data and AI climbed up 11 percent. Security declined by 1 percent. IBM did not break out most of the revenue figures for divisions within its software segment.

Within software, the company did report hybrid platform and solutions’ revenue of $4.7 billion, which grew 7 percent year over year ignoring foreign exchange. Transaction processing increased 10 percent to $1.9 billion, driven by in part by strong software renewal rates, Kavanaugh said.

The company’s consulting segment – which includes business transformation, technology consulting and application operations – saw revenue of $5 billion for the quarter, a 6 percent increase year over year.

Business transformation grew 5 percent to $2.3 billion ignoring foreign exchange. Technology consulting grew 5 percent to $1 billion and application operations grew 8 percent to $1.8 billion.

During IBM’s Q1 2023 earnings call in April, the company shared that it was seeing sustained demand for larger transformations that delivered meaningful ROI. At the same time, other IT projects considered to be more discretionary and were being delayed, predominantly in the United States, Kavanaugh said. “Second quarter client buying behavior played out much in the same way,” he added, noting that IBM’s signings were up more than 20 percent in Q2.

“Clients and partners continue to view technology as a source of competitive advantage. They rely on us to speed up the transformation journey, modernize applications and optimize the business workflow,” Krishna said. “To seize that opportunity, we are bringing new innovations to market and making investment in targeted growth markets.”

Infrastructure Slump

The infrastructure segment on the other hand – which includes zSystems, hybrid infrastructure, distributed infrastructure and infrastructure support – saw revenue for the quarter of $3.6 billion, falling 14 percent year over year. Similar to the software segment, IBM did not break out all of the revenue figures for divisions within the infrastructure segment.

Hybrid infrastructure decreased by 18 percent to $2.3 billion. zSystems fell 30 percent, distributed infrastructure dropped by 6 percent and infrastructure support fell 6 percent to $1.4 billion.

IBM’s infrastructure revenue in any quarter reflects product cycle dynamics, Kavanaugh said. “As expected, [there was a] disproportional impact the overall revenue growth this quarter, given the very successful launch of [IBM] z16 in the second quarter last year,” he said.

Overall Q2 2023 Results

For the second quarter of 2023 that ended June 30, IBM reported revenue of $15.5 billion, a result that stayed flat year over year. Americas revenue accounted for $8 billion, according to the company.

The tech giant posted adjusted earnings per share of $2.18 cents which beat Wall Street’s estimates of $2.01 per share. Net income for the quarter rose 13 percent to $1.6 billion, up from $1.4 billion one year ago.

IBM’s stock traded at $135.48 a share after hours on Wednesday, up less than 1 percent.