The News: IBM released its second-quarter earnings report for 2024, surpassing market expectations with significant growth in software and infrastructure segments, while raising its full-year free cash flow forecast. For more information, see the complete press release on IBM’s Q2 2024 earnings.
By the Numbers:
- Total Revenue: $15.8 billion, up 2% year-over-year.
- Software Revenue: $6.7 billion, up 7%.
- Consulting Revenue: $5.2 billion, down 1%.
- Free Cash Flow: $4.5 billion, up $1.1 billion year-over-year.
IBM Reports Q2 2024 Financial Results: Key Insights and Performance Review
Analyst Take: IBM under Arvind Krishna’s leadership is laser focused on both AI and Hybrid Cloud and this focus is starting to pay off for the company. IBM’s second-quarter performance in 2024 has demonstrated significant resilience and strategic advancement in critical areas, particularly in software and infrastructure. The company has shown commendable growth despite the challenging macroeconomic environment. We believe IBM’s focus on enterprise AI and hybrid cloud solutions is paying off, as evidenced by the strong performance in these segments.
A surge in demand for AI and hybrid cloud solutions has marked the broader market landscape preceding IBM’s announcement. Enterprises increasingly invest in these technologies to enhance operational efficiency and drive innovation. The competitive landscape includes major players such as Microsoft, Google, and Amazon, all of whom are aggressively expanding their AI and cloud offerings. Amidst this competitive environment, IBM’s strategic investments and innovations have positioned it well to capture market share.
Software Segment: Primary Growth Contributor
IBM’s software segment reported revenues of $6.7 billion, up 7.1% year-over-year. Strong performances in hybrid platform solutions and transaction processing fueled this growth. The hybrid platform and solutions segment saw a 5% increase, driven by Red Hat’s growth of 7% and automation’s impressive 15% rise. Data and AI, however, saw a slight decline of 3%. The transaction processing segment surged by 11%, indicating solid demand for IBM’s mission-critical software solutions.
Red Hat grew by 7%, driven by strong demand for its hybrid cloud solutions. The company’s investments in hybrid cloud technologies yield results as enterprises seek flexible and scalable cloud environments. The automation sub-segment saw a significant 15% growth, reflecting enterprises’ increasing adoption of automation technologies. I am a little concerned that 7% is not the 20%+ we used to see from Red Hat and I will be tracking this going forward to see whether it is a trend or a blip.
This growth is a testament to IBM’s robust automation portfolio, which includes tools that help businesses optimize their operations and reduce costs. On the other hand, Data & AI experienced a slight decline, highlighting the competitive pressures in the AI market and the need for ongoing innovation. Security grew by 2%, emphasizing the importance of cybersecurity in today’s digital landscape and IBM’s commitment to providing robust security solutions.
Consulting Segment: Fluctuating Results
The consulting segment saw a slight decline in revenue by 1%, bringing in $5.2 billion. However, when adjusted for constant currency, the segment showed a modest growth of 2%. The business transformation services within this segment grew by 3%, driven by finance and supply-chain transformations. This growth indicates enterprises continue investing in large-scale transformation projects to drive efficiency and competitiveness.
Technology consulting and application operations saw declines, reflecting the impact of discretionary spending cuts by clients. The decline in technology consulting suggests that some enterprises are postponing or scaling back their IT consulting projects. In contrast, the decline in application operations highlights challenges in maintaining and managing on-premises custom applications.
Infrastructure Segment: Consistent Growth
IBM’s infrastructure segment reported revenues of $3.6 billion, a 0.7% increase year-over-year. The hybrid infrastructure sub-segment grew by 4%, driven by a 6% increase in IBM Z revenues. This growth reflects the ongoing demand for IBM’s mainframe solutions, critical for many enterprises’ mission-critical workloads. As I said on X following the result kudos needs to go the Z leadership team. Delivering growth this deep, into z16 is an impressive feat. Normally this far into, what is typically an 8-10 quarter hardware refresh cycle, the IBM CFO is talking to flagging numbers and the cyclical nature of the mainframe. Not this time around. I have reached out to Ross Mauri’s team to get under the covers on why growth is still coming out of z16 and will report back.
Distributed infrastructure also grew, indicating solid demand for data-intensive workloads and IBM’s solutions in this space, again the Power team is doing solid work deep into a hardware cycle. Again kudos goes to Tom McPherson and his leadership team for driving a cycle deep beyond where growth is normally a factor However, infrastructure support services experienced a decline of 5%, highlighting the challenges in maintaining legacy support services as clients transition to more modern infrastructure solutions.
Granite Models: Revolutionizing AI Performance
One of IBM’s significant advancements in AI is developing and deploying the Granite models. These models, ranging from 3 billion to 34 billion parameters, offer cost-effective AI solutions that are easier to customize and tune. IBM’s decision to open-source the Granite models under Apache 2.0 licenses allows developers and enterprises to leverage these powerful tools while maintaining control over their data and customizations.
The Granite models have been optimized for various tasks, including coding and natural language processing, demonstrating top performance in numerous benchmarks. By making these models available on platforms like Hugging Face and GitHub, IBM fosters a collaborative environment that encourages innovation and accelerates AI adoption. The flexibility and cost-efficiency of these models are expected to drive widespread adoption and provide IBM with a competitive edge in the AI market. The strategy of a combination of both big and smaller models and them being open source is starting to pay off for IBM.
IBM’s approach to open-sourcing these models under Apache 2.0 licenses is a strategic move to democratize AI. By providing the source code and allowing modifications, IBM ensures that organizations can adapt the models to their unique needs, having greater innovation within the AI community. This openness builds trust and encourages widespread experimentation and customization, leading to new and improved AI applications. Too early to see whether Instruct Lab is material to earnings, but I am bullish on the approach.
The performance of the Granite models in coding and natural language processing tasks is particularly noteworthy. These models have achieved top rankings in various internal benchmarks, showcasing their ability to handle complex language tasks with high accuracy, we need to see external benchmarks but the trend lines look solid. From a strategic perspective, the introduction of the Granite models aligns with IBM’s broader vision of integrating AI across its product portfolio, ensuring seamless integration and interoperability. This strategic approach is poised to drive widespread adoption and solidify IBM’s position as a leader in the AI market.
Looking Ahead
IBM’s strategic focus on AI and hybrid cloud solutions positions the company well for sustained growth. Based on our analysis, we see several key trends and opportunities that IBM is poised to capitalize on:
- Enterprise AI: IBM’s continued investment in AI, mainly through its watsonx platform, is expected to drive significant value for clients. We believe that the company’s focus on fit-for-purpose AI models will offer cost-effective solutions that are easier to customize and tune, providing a competitive edge.
- Hybrid Cloud: Red Hat’s open-source technologies are integrated with IBM’s hybrid cloud offerings, a strategic advantage. Our discussions with vendors show a growing preference for hybrid cloud solutions that offer flexibility and data sovereignty. IBM’s robust portfolio, including OpenShift and RHEL, positions it well to meet this demand.
- Automation and Security: As businesses seek to optimize IT spending and automate processes, IBM’s strong automation portfolio, including recent acquisitions like Apptio and HashiCorp, will be critical. Additionally, the company’s focus on cybersecurity, highlighted by its partnership with Palo Alto Networks, will address the growing need for robust security solutions.
- Consulting Services: Despite short-term challenges, we believe IBM’s consulting services will rebound as enterprises resume discretionary spending. The emphasis on digital transformation and AI strategy development positions IBM as a strategic partner for long-term growth.
We expect IBM’s enterprise AI strategy to be a cornerstone of its future growth. By leveraging AI across its software, infrastructure, and consulting segments, IBM can provide comprehensive solutions that address the evolving needs of modern enterprises. The launch of InstructLab for model tuning and the open-sourcing of IBM’s Granite models are strategic moves to foster innovation and expand market reach.
Moreover, the hybrid cloud strategy, anchored by Red Hat, is anticipated to drive further integration and innovation. IBM’s open-source approach aligns well with industry trends, offering clients flexibility and reducing the total cost of ownership. This strategy is reminiscent of the Linux adoption wave, and we foresee similar success with AI and hybrid cloud technologies.
I would like to see more from the leadership team around the workforce. IBM is in my opinion top heavy and if it were to trim the executive ranks, and streamline operations we could be seeing IBM stock appreciation in the double digits. The playbook is well proven in Silicon Valley and if Arvind were to follow his peers in the tech sector this could make IBM the AI-fuelled growth stock it wants to be.
IBM’s commitment to automation and security positions it well for future challenges. Integrating Apptio’s cost management capabilities with IBM’s automation tools will enable clients to optimize technology spending effectively. The collaboration with Palo Alto Networks enhances IBM’s security offerings, addressing critical concerns in an increasingly complex IT landscape. The company’s AI, hybrid cloud, and automation investments yield positive results, positioning IBM for sustained growth. As enterprises navigate digital transformation, IBM’s comprehensive portfolio and strategic partnerships will be pivotal in driving innovation and delivering value to clients.
Daniel Newman and his co-host of The Six Five Webcast, Patrick Moorhead of Moor Insights and Strategy discusses IBM’s earnings in their latest episode. Check it out here and be sure to subscribe to The Six Five Webcast so you never miss an episode.
Disclosure: The Futurum Group is a research and advisory firm that engages or has engaged in research, analysis, and advisory services with many technology companies, including those mentioned in this article. The author does not hold any equity positions with any company mentioned in this article.
Analysis and opinions expressed herein are specific to the analyst individually and data and other information that might have been provided for validation, not those of The Futurum Group as a whole.
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Author Information
Regarded as a luminary at the intersection of technology and business transformation, Steven Dickens is the Vice President and Practice Leader for Hybrid Cloud, Infrastructure, and Operations at The Futurum Group. With a distinguished track record as a Forbes contributor and a ranking among the Top 10 Analysts by ARInsights, Steven's unique vantage point enables him to chart the nexus between emergent technologies and disruptive innovation, offering unparalleled insights for global enterprises.
Steven's expertise spans a broad spectrum of technologies that drive modern enterprises. Notable among these are open source, hybrid cloud, mission-critical infrastructure, cryptocurrencies, blockchain, and FinTech innovation. His work is foundational in aligning the strategic imperatives of C-suite executives with the practical needs of end users and technology practitioners, serving as a catalyst for optimizing the return on technology investments.
Over the years, Steven has been an integral part of industry behemoths including Broadcom, Hewlett Packard Enterprise (HPE), and IBM. His exceptional ability to pioneer multi-hundred-million-dollar products and to lead global sales teams with revenues in the same echelon has consistently demonstrated his capability for high-impact leadership.
Steven serves as a thought leader in various technology consortiums. He was a founding board member and former Chairperson of the Open Mainframe Project, under the aegis of the Linux Foundation. His role as a Board Advisor continues to shape the advocacy for open source implementations of mainframe technologies.