International Business Machines (IBM) Q1 FY25 earnings call: guidance and Q&A

What is the macro impact on consumption-based Software (Red Hat, TPS) and Consulting (DOGE, discretionary projects)? How does this affect the Investor Day subsegment guidance?

IBM did not see a significant slowdown in Q1 consumption-based Software, but projects a small potential slowdown in Red Hat if global GDP slows. Transaction Processing is seeing tailwinds. Consulting is susceptible to discretionary pullbacks and DOGE, with some contracts impacted, but the majority of federal work is mission-critical. IBM is maintaining its long-term financial investment thesis for accelerating revenue growth, with Software and Infrastructure as key drivers, and Consulting expected to stabilize.

“We are projecting though that if there is slowdown in global GDP, there could be a small slowdown, not a big slowdown in the Red Hat part of the consumption business, which just to remind you, is only between 10% and 20% of the total business.”

asked by Jim Schneider · answered by Arvind Krishna

How will IBM achieve its 5%+ full-year revenue guidance, especially with Red Hat facing tougher comps and TPS starting at 2%? Will cautious Consulting be offset by better Infrastructure expectations?

IBM's path to 5%+ growth is driven by Software (4 points contribution in Q1), the new mainframe innovation turning a 1-point headwind into a 1-point tailwind for the full year (2-point change), and over 2.5 points from M&A (HashiCorp). Red Hat is expected to maintain mid-teens growth for the year, contributing another 0.5 point. Consulting is prudently cautious with no expected contribution to growth, but the other factors combine to exceed 5%.

“Number one, that new innovation in our infrastructure turns 1-point headwind in 2Q to 1-point tailwind for the full year. That's a full 2-point change. So you go from 2% already to 4%. Number two, we are very excited. We closed HashiCorp at the end of February. Our actual contribution around inorganic in the first quarter, give or take, was about 1.5 points. To IBM, for the full year at '25, it's going to be north of 2.5. We get another point of M&A. So now you're up to 5% growth.”

asked by Wamsi Mohan · answered by James Kavanaugh

What is the size and discretionary nature of the federal Consulting business? Why did IBM provide an explicit Q2 revenue guide?

US federal business is less than 5% of IBM's total revenue, with 60% in Consulting and 40% in technology. Federal Consulting is less than 10% of total Consulting, and mostly mission-critical. IBM provided Q2 guidance due to the dynamic and uncertain macro environment, significant US dollar devaluation (8-9%), and a commitment to transparency. The range reflects FX volatility, while constant currency growth is expected at least 4%.

“Full transparency, we feel obligated with our credibility on what we see in the near term, given we're operating, as we talked about, in a very dynamic and uncertain macroeconomic environment, our best visibility right now is probably in the next 90 days.”

asked by Amit Daryanani · answered by James Kavanaugh

Why did Red Hat decelerate sequentially, and how will it reaccelerate? How significant is virtualization as a driver for Red Hat, especially with VMware changes?

Red Hat's 13.5% growth was within guidance, supported by its seventh consecutive quarter of high-teens ACV bookings. The deceleration was due to a moderation in consumption-based services (from low-mid teens to high single digits), which is only 10-20% of the business. Virtualization is a significant driver, with over $200 million in annualized bookings and a pipeline well north of $0.5 billion, as OpenShift becomes a platform for both containerization and virtualization, expanding its footprint.

“virtualization already, just the last couple of quarters, we've already notched in over $200 million of annualized bookings. And we've been building a pipeline that is well north of $0.5 billion worth of virtualization.”

asked by Ben Reitzes · answered by James Kavanaugh

Given the full-year revenue reiteration and FX tailwind, why isn't the free cash flow guide higher?

IBM is pleased with the $2 billion Q1 FCF, which is ahead of historical attainment. The company is being prudent by maintaining the $13.5 billion full-year FCF guidance, as 85% of FCF is yet to be generated. While FX can create tailwinds, IBM's hedging program (only for cash flows, not revenue, and limited to 30 currencies for 12 months) means there's an operating pretax margin headwind when the dollar devalues due to hedge wrap-around. The primary FCF driver remains high-quality adjusted EBITDA growth.

“I think it's prudent for us right now. We feel even stronger about our position around the $13.5 billion. But why take that up right now in this environment? It doesn't benefit us at all. We're focused on the durability, resiliency and driving the disciplined execution overall.”

asked by Erik Woodring · answered by James Kavanaugh

What macro impact is expected on the mainframe cycle, and would IBM take on more balance sheet risk to ease customer CapEx?

IBM is happy to lease hardware and software through its financing business for creditworthy clients, which is already in the model and doesn't significantly impact the balance sheet. The z17 mainframe cycle is expected to be very strong through FY25 and H1 FY26, similar to previous cycles, with volatility potentially playing in IBM's favor as clients consider capacity expansion. IBM maintains a strong capital structure and liquidity to invest in innovation and ensure durability.

“I actually expect the volatility plays in our favor because those who are thinking about capacity expansion in the end of the year are wondering whether it's more advantageous to them to do it earlier because there is a financial benefit if you have it as opposed to pay for overage, which is certainly possible.”

asked by Brian Essex · answered by Arvind Krishna