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    IBM
    Earnings call· Mar 2025(Q1 FY25)

    INTERNATIONAL BUSINESS MACHINES Q1 FY25 earnings call IBM

    Apr 23, 2025 Source

    Executive summary

    International Business Machines Corporation Q1 FY25 — Strong Start Exceeding Expectations, Driven by Software and AI Traction

    IBM delivered a strong Q1 FY25, surpassing expectations for revenue, profitability, and cash flow, driven by its focused hybrid cloud and AI strategy. The company maintained its full-year guidance for accelerating revenue growth and free cash flow, despite a fluid macroeconomic environment. Management highlighted the success of its Software segment, the upcoming z17 mainframe launch, and ongoing productivity initiatives as key drivers for future performance.

    Highlights

    5

    • Revenue grew 2% at constant currency, exceeding expectations.

    • Software revenue increased 9% at constant currency, driven by Red Hat, Automation, Data, and Transaction Processing.

    • Adjusted EBITDA grew 12% year-over-year, with a 240 basis points margin expansion.

    • Free cash flow reached $2 billion, marking the highest first quarter free cash flow in many years.

    • GenAI book of business is now over $6 billion inception to date, up over $1 billion in the quarter.

    Concerns

    4

    • Consulting revenue was flat at constant currency, impacted by client delayed decision-making in discretionary projects.

    • IBM Z revenue declined 14% as the z16 program wrapped up its 12th and final quarter.

    • Potential for greater variability in consumption-based services and software, including Red Hat, and Distributed Infrastructure due to macroeconomic uncertainty.

    • Consulting is more susceptible to discretionary pullbacks and DOGE-related initiatives.

    Guidance & targets

    9
    CategoryTargetConfidence
    Full-year revenue growth
    5%-plus
    high materiality
    High
    Full-year free cash flow
    about $13.5 billion
    high materiality
    High
    Full-year operating pretax margin expansion
    over 0.5 point
    medium materiality
    Medium
    Full-year tax rate
    mid-teens
    low materiality
    Medium
    Q2 revenue growth
    at least 4% at constant currency
    high materiality
    High
    Q2 revenue range
    $16.4 billion to $16.75 billion
    high materiality
    Medium
    Q2 operating pretax margin expansion
    consistent with the full year
    medium materiality
    Medium
    Q2 tax rate
    mid- to high teens
    low materiality
    Medium
    Red Hat growth
    mid-teens
    medium materiality
    High

    Segment performance

    3
    SegmentRevenueYoYQoQMargin
    Software
    Strong growth driven by Red Hat, Automation, Data, and Transaction Processing. Software's mix shift is a key driver of overall growth acceleration. 80% of annual software revenue is recurring.
    Automation growth: 15%Red Hat growth: 13%Data growth: 7%Transaction Processing growth: 2%Annual Recurring Revenue (ARR): $21.7BARR growth: 11%OpenShift ARR: $1.5BOpenShift growth: 25%
    		—9%—over 370 bps expansion
    Consulting
    Revenue stabilized at flat, showing sequential improvement. Clients are delaying decision-making on discretionary projects, impacting in-period signings. Good growth in transformational offerings like hybrid cloud and data, and application management. Prudently cautious outlook for the year.
    Backlog growth: mid-single digitStrategy and Technology revenue decline: 1%Intelligent Operations revenue: flat
    		—flatsequential improvementover 280 bps expansion
    Infrastructure
    Decline driven by the wrap-up of the z16 program's 12th and final quarter. Product cycle dynamics impacted power in Distributed Infrastructure. Storage showed strong double-digit growth. Continued investments in innovation.
    Hybrid Infrastructure decline: 7%IBM Z decline: 14%Distributed Infrastructure decline: 4%Storage growth: double-digit
    		—down 4%—down about 150 bps

    Operational metrics

    19
    Adjusted EBITDA
    $3.4Bup 12%
    Q1 FY25

    Drove 240 basis points of adjusted EBITDA margin expansion.

    Operating pretax income
    $1.7B
    Q1 FY25

    Operating pretax margin expanded by 50 basis points.

    Operating EPS
    $1.60
    Q1 FY25

    Exceeded expectations.

    Operating gross profit margin expansion
    190 bps
    Q1 FY25

    Driven by operating leverage and yields from accelerated productivity initiatives.

    Operating pretax margin expansion
    50 bps
    Q1 FY25

    Excluding year-over-year divestiture dynamics and net year-to-year workforce rebalancing, operating pretax margin was up 180 basis points.

    Red Hat ACV bookings growth
    high teens7th consecutive quarter
    Q1 FY25

    Underpinned strong Red Hat performance.

    Vendor spend reduction
    over $1B
    ongoing

    Achieved by optimizing supply chain and service delivery.

    Annual run rate savings
    $3.5B
    exited 2024

    Achieved through productivity initiatives, contributing to margin performance.

    Cash and investments balance
    $17.6Bup $2.8B from end of 2024
    Q1 FY25 end

    Maintained a strong liquidity position despite acquisitions.

    Debt balance
    $63B
    Q1 FY25 end

    Includes $10 billion of debt for the financing business, with a receivables portfolio that is over 75% investment grade.

    Shareholder returns (dividends)
    just over $1.5B
    Q1 FY25

    Returned to shareholders in the form of dividends.

    US federal business as % of total revenue
    less than 5%
    annual

    Overall exposure to US federal business.

    US federal Consulting as % of total Consulting
    less than 10%
    annual

    Specific exposure within the Consulting segment.

    US federal market share
    less than 3%
    annual

    Overall market share in the US federal sector.

    Red Hat virtualization annualized bookings
    over $200M
    last couple of quarters

    New bookings related to virtualization offerings.

    Red Hat virtualization pipeline
    well north of $0.5B
    current

    Pipeline for virtualization opportunities.

    Red Hat RHEL growth
    13%
    Q1 FY25

    Double-digit growth in Red Hat Enterprise Linux.

    Red Hat Ansible growth
    strong mid-teens
    Q1 FY25

    Strong growth in Ansible, capitalizing on client cost efficiency and GenAI.

    Red Hat consumption-based services growth
    high single digitsmoderated from low mid-teens
    Q1 FY25

    Moderation in growth for consumption-based services, which represent 10-20% of Red Hat's business.

    Industry KPIs

    7
    MetricValueDetails
    Rpo current rpoup 6%%
    Customer logo metrics95%%
    Large customer cohorts45 of top 50count
    Software recurring arr$21.7BUSD
    Bookings tcv book to billhigh teens%
    Genai ai book of businessover $6BUSD
    Consumption revenue growthhigh single digits%

    Orderbook & backlog

    5
    Consulting backlogmid-single digit growthQ1 FY25

    Solid backlog growth.

    Consulting backlogup 6%Q1 FY25

    Solid backlog growth.

    Red Hat 6-month revenue under contractgrowing mid-teensQ1 FY25

    Underpins Red Hat's expected mid-teens growth for the full year.

    Consulting annualized backlogover $30BQ1 FY25

    Total annualized backlog for Consulting, over a duration of multiple years.

    DOGE-impacted backlogless than $100MQ1 FY25

    Impacted backlog from a handful of contracts in US federal Consulting.

    Product announcements

    2
    ProductTypeDetails
    z17launch
    IBM Quantum System Twoexpansion

    Deals & partnerships

    3
    HashiCorpAcquisition of a company bringing leading automation and security tools.$7.1B (part of total acquisition spend)

    IBM closed the acquisition of HashiCorp, integrating its automation and security tools with IBM's hybrid cloud strategy.

    ASTAcquisition of AST.

    IBM closed the acquisition of AST during the quarter.

    Basque GovernmentPartnership to deploy Europe's first IBM Quantum System Two.

    IBM partnered with the Basque Government to deploy Europe's first IBM Quantum System Two in Spain, marking a milestone in global quantum leadership.

    Risks & headwinds

    5
    Macroeconomic uncertaintyNear term, rest of the year

    Fluid situation, significant U.S. dollar devaluation (8% to 9%)

    Mitigation: Focused strategy on hybrid cloud and AI, client trust, diversity across businesses/geographies/industries, productivity initiatives, strong balance sheet.

    Discretionary project delays and pullbacksNear term

    Consulting revenue flat, some contracts impacted in Q1 (e.g., U.S. AID)

    Mitigation: Focus on mission-critical work, integrated value of Consulting driving technology adoption, monitoring dynamic process.

    Variability in consumption-based services and softwareRest of the year

    Red Hat consumption-based services moderated to high single digits (from low mid-teens)

    Mitigation: Strong underlying bookings growth in Red Hat, focus on virtualization and automation, diversified portfolio.

    Higher cash taxes and CapExFY25

    Headwinds for free cash flow

    Mitigation: Accelerating productivity initiatives to protect profitability and free cash flow, disciplined cost management.

    Supply chain and inventory levelsQ1 FY25

    Higher inventory levels

    Mitigation: Proactively bolstered supply chain ahead of z17 launch, strategically diversified and streamlined supply chain, limited direct exposure to current U.S. tariff policy.

    What to watch in Q2 FY25

    5

    Consulting contribution to IBM

    next quarter
    CurrentFlat revenue in Q1 FY25
    TargetStabilization or improvement in sequential growth

    Why it matters

    Consulting is sensitive to discretionary spending and macro conditions; its performance indicates broader client confidence and impacts overall revenue mix.

    But given the current environment, we are appropriately more cautious on Consulting's contribution to IBM this year.

    Q&A highlights

    6

    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

    2 min read6 chapters

    Detailed Narrative

    01

    Hybrid Cloud & AI Strategy Success

    IBM's performance in Q1 FY25 reflects the continued success of its focused strategy around hybrid cloud and AI, addressing client needs for cost savings, productivity gains, and trusted partnerships. The generative AI book of business has grown to over $6 billion inception to date, with a significant increase of over $1 billion in the quarter. This book of business is primarily driven by Consulting (4/5) and Software (1/5), leveraging AI assistants, agents, and middleware in hybrid environments.

    02

    Software Segment Strength

    The Software segment led growth, increasing 9% at constant currency. This was fueled by strong performance across Red Hat (up 13%), Automation (up 15%), Data (up 7%), and Transaction Processing (up 2%). Software's annual recurring revenue (ARR) reached $21.7 billion, an 11% increase year-over-year, with 80% of annual software revenue being recurring. OpenShift, a key offering, now has an ARR of $1.5 billion, growing 25%.

    03

    Mainframe Innovation & Cycle

    The z16 mainframe program concluded its 12th and final quarter, demonstrating strong performance and customer adoption. IBM announced the upcoming launch of z17, which will deliver enhanced AI acceleration through multimodal AI capabilities, new security features, and tools for system usability. Management anticipates a strong mainframe cycle through FY25 and H1 FY26, driven by client interest in security, AI, and increased capacity, with volatility potentially playing in IBM's favor.

    04

    Productivity Initiatives & Margin Expansion

    IBM's long-standing productivity mindset contributed to significant margin expansion in the quarter. Operating gross profit margin expanded by 190 basis points, adjusted EBITDA margin by 240 basis points, and operating pretax margin by 50 basis points (180 basis points excluding divestiture and workforce rebalancing). The company has achieved $3.5 billion in annual run rate savings by the end of 2024 through enterprise operation transformation, vendor spend optimization, and physical infrastructure rightsizing.

    05

    Macro Environment & Client Behavior

    While the macro environment remains uncertain and fluid, IBM's diverse client base across industries and geographies, coupled with its focus on mission-critical solutions, positions it for resilience. Clients are prioritizing cost efficiencies and productivity, making hybrid cloud, automation, and on-premise solutions critical. Although some discretionary projects in Consulting may see delays, the company has not observed a material change in client buying behavior through the first three weeks of Q2.

    06

    Capital Allocation & Balance Sheet

    IBM maintains a strong liquidity position and an investment-grade balance sheet. The company ended the quarter with $17.6 billion in cash, an increase of $2.8 billion from the end of 2024, despite spending $7.1 billion on acquisitions, including HashiCorp. IBM returned over $1.5 billion to shareholders in dividends and accessed debt markets for over $8 billion on attractive terms, demonstrating disciplined capital allocation.

    AI-generated summary of the company’s earnings call. Not investment advice.