- IBM's GenAI business reached $7.5B, with momentum accelerating each quarter
- Hybrid cloud and AI drove strong Q2 results, though software revenue missed estimates
- Shares fell 5% despite earnings beat, as investors reacted to macro and segment softness
IBM's strong Q2 earnings were driven by growing AI and hybrid cloud momentum, but a software revenue miss and macro concerns sent shares lower.
IBM's AI and hybrid cloud bets are paying off in second quarter earnings, with CEO Arvind Krishna reporting $7.5B in GenAI business and steady growth despite a challenging economic environment.
"Our strategy remains focused, hybrid cloud and artificial intelligence," Krishna said on the company's earnings call Wednesday. The company is building its strength on "client trust, flexible and open platforms, sustained innovation, deep domain expertise and a broad ecosystem," he said, adding that GenAI business stands at $7.5 billion since its inception, with momentum accelerating quarter over quarter.
IBM is seeing increasing traction in Red Hat Enterprise Linux (RHEL) AI, and IBM's own Granite family of AI foundation models, as well as the supporting consulting services to deploy AI, he noted. And new collaborations will ensure deeper integration of IBM watsonx AI within workflows on Oracle, Amazon Web Services (AWS), Box and Salesforce.
AI and hybrid cloud take center stage
IBM's hybrid cloud and AI focus were bright lights in Q2 results that were mixed news for the venerable technology giant.
On one hand, the company reported 8% revenue growth year-over-year (5% at constant currency) -- a significant improvement compared to the bleak growth, lower than 1%, in the first quarter.
Earnings per share are $2.80, compared to the analysts' expected $2.65.
Yet, shares were down 5% in immediate trading activity. IBM's software revenue missed estimates with reported earnings of $7.4 billion, which could be a possible reason for the dip.
Krishna told analysts that "geopolitical tensions are prompting a few clients to move cautiously." Added to the fact is U.S. federal spending cuts in the first half of the year that caused many businesses to tighten their budget, dealing a negative impact to IBM's consulting division. But Krishna does not expect this to create "long-term headwinds."
IBM's infrastructure and consulting business are up, with the two units recording revenue growth of 14% and 3% this quarter. IBM released infrastructure products like the z17 mainframe, known for its serious AI capabilities, and Quantum System 2 loaded with software-defined networking and in-network computing.
Analysts are optimistic that the recent acquisition of HashiCorp, known for its Terraform infrastructure-as-code tool, will further boost overall growth in the coming quarters.
"I don't think we've seen the full impact of IBM's AI technology across all their offerings and software stacks yet. I think there's still untapped potential," said Roy Chua, founder of AvidThink, an independent research and advisory firm.
He added, "With the upcoming integration of HashiCorp, we will likely see increased strength on the automation front as well. The continued strong performance of Red Hat (hybrid cloud) with 16% 2Q growth (14% in constant currency) is an indicator that their hybrid cloud and automation software strategies are sound."
Coward's exit leaves IBM's networking future uncertain
Last week, Andrew Coward, GM of software networking, resigned from his position after leading the networking business for nearly five years, and sealing five acquisition deals, including HashiCorp.
"I find [Coward's resignation] rather surprising, given the energy and enthusiasm he brought to his acquisition mission at IBM," said Laura Wilber, senior technology and industry analyst at Enea. "During an interview at [Mobile World Congress] this year, I recall him saying with a big grin - even glee - that it was no secret that he loves coming to the show to scout for the next company to acquire.
"Given that acquiring a company is often the easy part compared to integrating it, I hope he has left carefully laid out integration plans for his successor," she added.
Coward's departure leaves uncertainty about what IBM's future roadmap will look like for networking and telecom.