IBM Q1: Demand for hybrid cloud and enterprise-focused AI prevails as Big Blue beats expectations

Results showed that software needs remain “steady” while consulting shows sign of slowing down

IBM has reported first quarter 2023 results that out-matched Wall Street expectations as the company hails customer demand for its open hybrid cloud platform and enterprise-focused AI.

Q1 revenues remained relatively flat at $14.3bn, a minor rise of 0.4 per cent.

"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," said Arvind Krishna, IBM chairman and chief executive officer.

"This gives us confidence in our current growth expectations for revenue and free cash flow for the year."

IBM's software segment - which includes hybrid cloud, Red Hat, automation, data, artificial intelligence and security - brought in $5.9bn in revenue, an increase of up 2.6 per cent.

Meanwhile its consulting business saw revenue of $5bn for the quarter, an 8.2 per cent increase year on year.

IBM executives acknowledged "deceleration" and "weakness" in its consulting arm during Q1 of its 2023 fiscal year, but software demand remained "very steady" as the vendor detailed some of its investments in bringing more AI to enterprises, which could prove an opportunity for partners.

"A lot of our software is running critical systems for our clients," Krishna said on an earnings call. "And we don't see those very subject to what we see in the current macroeconomic environment. And so that's what gives us confidence."

He added: "The movement toward hybrid cloud and the ability to take advantage of AI for enterprise productivity is perhaps going to be a tailwind as we enter the second half of the year - because I do think that clients are going to do a lot of automation and a lot of lot of cost cutting, which will likely benefit elements of our software portfolio."

Click through to hear what is going on with IBM's software and consulting arms...

IBM Q1: Demand for hybrid cloud and enterprise-focused AI prevails as Big Blue beats expectations

Results showed that software needs remain “steady” while consulting shows sign of slowing down

Software spending "very steady" against a consulting slowdown

An analyst on the call asked Krishna about overall IT spending, directly referencing CDW's Tuesday report that the company expects the US IT market to "decline at a high single-digit rate in 2023."

CDW executives said in the report the company saw "a period of intensifying economic uncertainty that led our customers to spend more cautiously and prioritise mission-critical initiatives," resulting in "first-quarter performance below our expectations."

Krishna said that in the US, IBM "did see some slowing down in consulting projects," but no project cancellations.

"I want to caution that weaknesses are shrinking," he added. "Double-digit rates just went down into six to eight per cent, which is still healthy."

He believes the consulting slowdown could spread globally, but it should not spread into the software segment, whose demand remained "very steady."

"We are not seeing any signs of weakness in software," he said, noting that IBM sells only business-to-business software, nothing consumer-facing.

IBM Q1: Demand for hybrid cloud and enterprise-focused AI prevails as Big Blue beats expectations

Results showed that software needs remain “steady” while consulting shows sign of slowing down

IBM focused on enterprise AI

Although the current fervour over AI is focused on consumer-facing tools such as text-generator ChatGPT and image-generator Dall-E - both created by Microsoft-backed OpenAI - Krishna sees generative AI and large language models (LLMs) as having "a tremendous application to the B2B side of AI inside enterprises" - namely, in customer care, IT operations, digital labour and cybersecurity.

IBM is automating thousands of call centre responses with AI, saving human resources (HR) and accounting teams thousands of hours in labour-intensive data entry tasks.

Krishna didn't name Microsoft and Google - which unveiled its consumer-facing Bard text-generator this year, but said that consumer AI "is going to be a home run for those companies that are going down that path."

By 2030, AI should add $16trn to the global economy, according to Krishna.

"We are seeing a lot more interest from businesses in using AI to boost productivity and reduce costs," he said.

"Productivity gains will come from enterprises turning their workflows into simpler automated processes with AI."

For enterprises, generative AI users will "worry about the data" used to train models and "cannot have an answer that occasionally inserts some fiction into the answer - they need an answer that is from reliable sources only."

IBM is in the race for enterprise AI, Krishna assured analysts on the call. In February, the vendor introduced Vela, an AI-optimised cloud-native supercomputer.

IBM Q1: Demand for hybrid cloud and enterprise-focused AI prevails as Big Blue beats expectations

Results showed that software needs remain “steady” while consulting shows sign of slowing down

IBM on M&A

When asked about potential mergers and acquisitions in the future, Krishna said that IBM is interested in buying companies involved in hybrid cloud, AI, data, cyber, automation and accelerating consulting.

"As asset prices adjust, this could be quite an opportunistic time" for acquisitions, Krishna said.
"Now, is it going to be opportunistic in a month, or in three months, or 12 months, I can't really predict."

Krishna also told analysts that IBM faces "the same inflation that the rest of the world has seen" in employee wages.

"Our employees are expecting higher wages. As we hire new people, they get hired in at higher wages than their similar colleagues were a year ago," he said. "We have to get a return on that back from our clients."