International Business Machines Corp. reported better-than-expected sales and affirmed its cash flow forecast in a sign that demand for software, mainframe computers and hybrid cloud services remain steady.
(Bloomberg) — International Business Machines Corp. reported better-than-expected sales and affirmed its cash flow forecast in a sign that demand for software, mainframe computers and hybrid cloud services remain steady.
Sales rose 6.5% to $14.1 billion in the third quarter, the Armonk, New York-based company said Wednesday in a statement. Analysts, on average, estimated $13.5 billion, according to data compiled by Bloomberg. IBM expects full-year revenue growth will exceed the company’s previous mid-single digit guidance while free cash flow will hit the estimate of $10 billion.
The shares climbed about 4% in extended trading after closing at $122.51 in New York. IBM has been a relative safe haven in the tech market meltdown, falling only 8.3% this year compared with a 36% loss for the iShares Expanded Tech Sector ETF.
IBM’s resilience comes from its focus on mission-critical services for businesses, Chief Executive Officer Arvind Krishna said on a call with analysts after the results were released. Looking forward, Krishna said demand for information technology in the Americas and Asia is “very robust,” while energy price volatility and inflation in Europe could result in “a bit of a downturn.”
Though Krishna is betting IBM’s future growth on the lucrative market for cloud computing and artificial intelligence, mainframe sales helped its infrastructure unit generate a 15% increase in revenue — the fastest-growing division in the quarter. A new model should support mainframe sales through at least the first half of next year, Bank of America analyst Wamsi Mohan wrote in a note ahead of earnings.
Software sales jumped 7.5% to $5.8 billion, while consulting gained 5.4% to $4.7 billion. Revenue produced by Red Hat, the acquired division that has been a key part of Krishna’s turnaround strategy, increased 12%, another comparatively slow quarter for a unit that has regularly posted growth of more than 20% since the 2019 purchase.
The figures indicate steady IT spending, but “given persistent pressure in the global economic environment, we expect to see some deceleration in these segments,” wrote Bloomberg Intelligence’s Anurag Rana after the results.
Big Blue’s internationally skewed sales continue to be damped by a historically strong US dollar. The company said currency fluctuations cut its third-quarter revenue by 9 percentage points and would slice full-year growth by about 7 percentage points.
The strong dollar is impacting margins and the company has responded by increasing prices for products and consulting, Chief Financial Officer Jim Kavanaugh said in an interview. Gross margin was 52.7% in the period ended Sept. 30, more than 2 percentage points below analysts’ average estimate. IBM has spent more than $1 billion on acquisitions this year, which has been “more than offset by proceeds from the vested businesses,” Kavanaugh said on the call.
Earnings, excluding some items, was $1.81 a share in the quarter, in line with estimates. The company reported a net loss of $3.2 billion, impacted by a previously announced one-time $5.9 billion pretax charge to offload pension obligations to two life insurers, Prudential Financial Inc. and MetLife Inc.
Last November, IBM spun off a large portion of its legacy infrastructure services unit into a new company called Kyndryl Holdings Inc. Sales to Kyndryl continue to make up a significant portion of IBM’s revenue, including an additional 3.5 percentage points of full-year revenue growth in constant currency.
(Updates with comments from CEO in the fourth paragraph.)
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