IBM revenues grew just 0.4 percent year-on-year in Q1 2023, held back by its Infrastructure business unit but with storage hardware a bright spot. It sees M&A possibilities ahead and wants to boost its growth with acquisitions.
The legacy player reports revenues from four business units: Software, Consulting, Infrastructure, and Finance. Overall revenues were $14.3 billion with a profit of $927 million, an increase of 26.5 percent on a year ago.
CEO and chairman Arvind Krishna said: “Our first quarter results demonstrate that clients continue turning to IBM for our unique combination of an open hybrid cloud platform, enterprise-focused AI, and business expertise to unlock productivity and drive efficiency in their operations. This gives us confidence in our current growth expectations for revenue and free cash flow for the year.
“Performance was led by software and consulting as clients continue to accelerate their digital transformations, modernize their applications, automate their workflows and create flexible and secure hybrid cloud environments.”
IBM is seeing customers focus on digital transformation slanted towards cost takeout and a quick ROI.
CFO and SVP James Kavanaugh explained: “In the quarter, we remained focused on the fundamentals of our business, increasing productivity and generating operating leverage. As a result, we again expanded our gross profit margin, improved our underlying profit performance and increased our cash generation. We are well-positioned to continue investing for growth and returning value to shareholders through dividends.”
The four segment results were:
- Software – revenues of $5.9 billion, up 2.6 percent
- Consulting – revenues of $5.0 billion, up 2.8 percent
- Infrastructure – revenues of $3.1 billion, down 3.7 percent
- Financing – revenues of $0.2 billion, up 27.3 percent
Storage products are sold as hardware in the Infrastructure BU and also in the Software BU. The Infrastructure unit sells hybrid infrastructure products and recorded revenues of $1.7 billion. Within that, zSystem mainframe revenues were up a solid 7 percent annually but distributed infrastructure was down 3 percent. Infrastructure support revenues went down 9 percent.
IBM said distributed infrastructure performance was helped by storage growth but hindered by the larger Power10 component, where the high-end Power10 system launch is complete. The actual storage revenue number wasn’t revealed.
The Software BU’s results were sprightlier, with Hybrid Platforms and Solutions up 2 percent at $4.2 billion. This includes the main driver, Red Hat, with products up 8 percent, and three also-rans. Automation and security software were both down 1 percent while Data and AI revenues rose 1 percent. The transaction processing part of the Software BU saw revenues rise 3 percent to $1.7 billion.
In the Red Hat area, IBM is now seeing OpenShift annual recurring revenue (ARR) reach $1 billion, which helped the overall Hybrid Platforms and Solutions ARR hit $13.5 billion. Storage software revenues within the Software BU were not disclosed. Kavanaugh said that the DB2 product was included in the data and AI segment, where it serves “as the underpinnings for modern AI and mission-critical workloads.”
- Free cash flow: $1.3 billion, up $0.1 billion annually
- Cash and marketable securities: $17.6 billion, up $8.8 billion from year-end 2022
- Total debt: $58.7 billion (was $54.2 billion a year ago)
- Dividends paid out: $1.5 billion
On an earnings call Krisha said: “Our focus remains on revenue growth and free cash flow,” with Kavanaugh adding that, for the full 2023 year: “[We] expect free cash flow of about $10.5 billion, which is up over $1 billion year-to-year.”
And Kavanaugh mentioned: “Software … and consulting … are our growth vectors and now represent about three quarters of our annual revenue.” As the z16 mainframe cycle winds down: “We expect 2023 infrastructure revenue to decline. [This] should impact IBM’s overall revenue growth by over 1 point.”
IBM is very pleased with its Red Hat acquisition, with Kavanaugh saying: “We’re four years into this acquisition. We have quadrupled the Red Hat revenue from pre-acquisition in three and half years.”
That positive background was there when Krishna answered a question about IBM’s merger and acquisitions activity, saying: “M&A is a very definite part of our model.”
He explained: “As asset prices adjust, this could be quite an opportunistic time … We’re going to be judicious. We’re going to wait for the right time. And it is going to be in the areas that we want. Those areas are going to be in our higher-value software and in areas where consulting can accelerate. We expect to remain 60 percent, maybe 75 percent of our total spend will be in software. The remaining will be in consulting. In software, we’re going to stick to our areas: hybrid cloud, artificial intelligence and data, cyber, automation.”