IBM Earnings: Mixed Results but Even-Keeled Outlook

IBM’s IBM second-quarter results were mixed, with a revenue miss but a strong earnings beat. Yet, with a maintained outlook, IBM appears to be on a steady path for the remainder of the year to hit moderate revenue growth thanks to steady performance in software and consulting, especially related to the boom in data and artificial intelligence. We retain our fair value estimate of $126 per share for the narrow-moat IT services provider, which leaves shares slightly overvalued. We continue to believe that there are more appealing opportunities in the IT services space, such as Cognizant CTSH, given our $91 fair value estimate for the narrow-moat name.

IBM reported revenue flat compared with the prior-year quarter, at constant currency, posting $15.5 billion in the quarter. Infrastructure revenue weighed down the quarter by declining 14% year over year, at constant currency. Nonetheless, this was expected, due to the overall cyclicality of the mainframe business. We reiterate our thesis that mainframes remain a specialty within IBM’s portfolio, relative to spaces that we believe now have less differentiation compared with competition. Software and consulting revenue grew at a healthy pace at 8% and 6%, respectively, year over year in constant currency. It came as no surprise that IBM is benefiting from the pickup in interest in all things AI. Data and AI software grew at 11% year over year in constant currency, leading the pack of IBM’s software subsegments. While this is a positive sign, we remain conservative on IBM’s AI goals given past AI failures, including that of Watson Health, which IBM sold in 2022. Currency remained a headwind to IBM’s overall profit, contributing to non-GAAP earnings per share for the quarter of $2.18, which was down 6% year over year.

IBM maintained its fiscal 2023 revenue growth outlook in the 3%-5% range at constant currency, while also holding its $10.5 billion free cash flow estimate for the year constant.