IBM Q1 revenue and profit both exceeded expectations, but software growth disappointed; stock plunged after hours | Earnings Report Insights

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IBM released a first-quarter financial report with both revenue and profits exceeding Wall Street expectations, with AI demand continuing to support its business. However, the growth rate of the company’s core growth engine—the software business—failed to surpass analysts’ expectations, and the consulting business was virtually stagnant at constant currency, leaving investors still worried that AI may disrupt its traditional businesses.

On April 22, the latest financial report showed IBM’s total revenue in the first quarter reached $15.9 billion, up 9% year-on-year and above analysts’ average expectation of $15.6 billion. Adjusted earnings per share was $1.91, also beating Wall Street’s expectation of $1.81.

Chief Financial Officer Jim Kavanaugh said, "AI continues to be a tailwind for our business, whether it’s the demand for technology and innovation related to AI, or services that help businesses deploy, govern and scale AI."

Despite overall resilient fundamentals, IBM’s stock price fell more than 7% in after-hours trading to around $234, with a cumulative decline of nearly 15% since the beginning of the year. Jefferies analyst Brent Thill pointed out that investors were expecting stronger results from the software business, and Wall Street may question whether customers are holding off on purchases from IBM as they wait to see new tools from AI vendors.

Dual Engines: Software and Infrastructure Drive, Mainframe Shines

Software and infrastructure were the core supports for this quarter’s performance.

The financial report shows software business revenue reached $7.05 billion, up 11% year-on-year, basically in line with analyst expectations. Breaking it down, data business grew 19% year-on-year, hybrid cloud (including Red Hat) grew 13%, and automation business grew 10%, reflecting continuous demand for data management and automated deployments in multi-cloud environments.

The infrastructure business was particularly outstanding, with revenue of $3.32 billion, up 15% year-on-year, beating analyst expectations. IBM Z mainframe business grew 51% year-on-year, and hybrid infrastructure business grew 28%, confirming the irreplaceability of mainframes in financial and government enterprise core computing, and strongly supporting the overall expansion in profit margins this quarter.

Kavanaugh said AI-related work is driving increased demand for IBM infrastructure software, enabling customers to access mainstream AI models. The company expects generative AI-related work this year to contribute roughly two percentage points to software business growth.

Consulting Business Weak Growth, Biggest Market Concern

While software and infrastructure soared ahead, the relatively sluggish consulting business stood out as the biggest weakness in this financial report. Consulting business first-quarter revenue was $5.27 billion, a nominal year-on-year increase of 4%, but at constant currency, only grew by 1%.

The consulting business is typically seen as a barometer of corporate IT spending willingness. In the current macroeconomic environment, although companies are willing to pay for AI tools and software infrastructure to boost efficiency, clients still remain cautious about large, long-cycle consulting projects. The market is concerned that if macroeconomic pressures persist, this tightening of IT budgets may gradually spread to other business lines.

Notably, in February this year, AI startup Anthropic released a tool said to help modernize the old programming languages running on IBM mainframes. This triggered IBM's largest single-day stock plunge in decades and further intensified market concerns about AI disrupting IBM's existing business.

Margin Expansion Across the Board, Ample Cash Flow Supports M&A and Dividends

Setting aside partial business concerns, IBM’s overall financial health this quarter remained solid. Non-GAAP gross margin reached 57.7%, up 110 basis points year-on-year; GAAP gross margin rose to 56.2%, up 100 basis points year-on-year; non-GAAP pre-tax margin reached 13.4%, up 140 basis points year-on-year.

On cash flow, free cash flow reached $2.2 billion in the first quarter, an increase of about $300 million year-on-year, beating analysts’ expectation of $2.04 billion. Ample cash enabled IBM to return $1.6 billion in dividends to shareholders while also completing the acquisition of data streaming platform Confluent, further supplementing its AI ecosystem. At the end of the quarter, the company held a total of $11.8 billion in cash and securities.

The IBM board also announced an increase in its quarterly dividend to $1.69 per share, up slightly from the previous $1.68. This marks the 31st consecutive year IBM has increased its dividend, maintaining its uninterrupted payout record since 1916. Dividends will be paid on June 10 to shareholders of record as of May 8.

Full-Year Outlook Unchanged, Whether AI Can Continue to Drive Growth Remains Key

Looking ahead for the full year, IBM maintained its previous guidance, expecting revenue to grow more than 5% at constant currency by 2026, and free cash flow to increase by about $1 billion year-on-year. Kavanaugh said this was IBM’s strongest quarterly revenue growth performance in years.

However, the core question in the market remains unresolved: As AI tools rapidly penetrate the enterprise software market, whether IBM can continuously translate its AI strategy into measurable incremental performance, while retaining its existing customer base, is the key variable that will determine its performance for the year.

Analysts point out that IBM has reinvented itself as a high-growth company centered on software, completing major acquisitions of Red Hat, HashiCorp, and Confluent. However, this transformation path also makes it a focal point for concerns about AI disruption.

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