IBM Q1 Earnings Call: AI, Software, and Productivity Initiatives Drive Outperformance

Technology and consulting giant IBM (NYSE:IBM) reported Q1 CY2025 results beating Wall Street’s revenue expectations, but sales were flat year on year at $14.54 billion. The company expects next quarter’s revenue to be around $16.56 billion, close to analysts’ estimates. Its non-GAAP profit of $1.60 per share was 12% above analysts’ consensus estimates.

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StockStory’s Take

IBM’s first quarter results were shaped by the company’s ongoing focus on hybrid cloud and artificial intelligence solutions, with management highlighting broad-based strength in its software segment—particularly in automation, Red Hat, and data products. CEO Arvind Krishna specifically attributed the quarter’s performance to IBM’s ability to address clients’ cost-saving and productivity needs, emphasizing strong demand for generative AI and hybrid cloud offerings. Krishna also pointed to the company’s history of delivering mission-critical solutions and its trusted relationships with enterprise clients as central to IBM’s resilience amid shifting market conditions.

Looking ahead, management stated that IBM’s full-year growth outlook remains intact, supported by continued momentum in software, new product launches like the z17 mainframe, and recent acquisitions such as HashiCorp. While the company maintained its revenue and free cash flow targets, CFO Jim Kavanaugh noted a more cautious stance on consulting services due to macroeconomic uncertainty and potential discretionary pullbacks. Krishna affirmed, “We are maintaining our full-year guidance for accelerating revenue growth to 5% plus, and above $13.5 billion of free cash flow.”

Key Insights from Management’s Remarks

IBM’s management emphasized the role of its software portfolio and productivity initiatives as key drivers of the quarter’s results, while acknowledging ongoing macroeconomic uncertainty and segment-specific trends.

• Software Segment Momentum: Growth in software was led by automation, Red Hat, and data products, with Red Hat OpenShift annual recurring revenue now at $1.5 billion and strong double-digit growth across several sub-segments. Management noted that approximately 80% of software revenue is recurring, providing stability.
• Generative AI Adoption: The company reported a generative AI book of business exceeding $6 billion, with about 20% from software and the remainder from consulting. Management described early enterprise adoption, particularly as clients seek to realize productivity gains and cost savings through AI-enabled solutions.
• Productivity and Cost Discipline: IBM achieved margin expansion and improved free cash flow by embedding AI and automation into more than 70 internal workflows—ranging from HR to finance—and reducing vendor spend by over $1 billion through supply chain optimization.
• Infrastructure Cycle Dynamics: The infrastructure segment declined due to the conclusion of the z16 mainframe cycle, but management expects the newly launched z17 to drive renewed growth, citing client interest in enhanced AI acceleration and security features.
• Consulting Segment Variability: Consulting revenue was flat, with management attributing this to delayed decision-making and discretionary project pullbacks, especially in federal and government-related contracts. IBM remains cautious on the outlook for consulting due to its sensitivity to macroeconomic factors.

Drivers of Future Performance

IBM’s outlook for the remainder of the year centers on software-driven growth, new infrastructure products, and ongoing productivity initiatives, while recognizing risks in consulting and external conditions.

• Software Recurring Revenue: Management believes that the high proportion of recurring revenue in software, bolstered by ongoing innovation and mid-teens growth in Red Hat, will continue to support overall revenue acceleration and margin expansion.
• Mainframe Product Cycle: The recent introduction of the z17 mainframe is expected to shift the infrastructure segment from a headwind to a tailwind, with client demand for AI acceleration and security features likely to drive uptake in the second half of the year.
• Consulting Sensitivities: IBM acknowledged that consulting results may remain variable, as discretionary projects are vulnerable to shifts in economic conditions and government spending patterns. Management is taking a prudent approach to forecasting this segment’s contribution.

Top Analyst Questions

• James Schneider (Goldman Sachs): Asked about potential macro impacts on software and consulting segments. Management replied that software consumption and transaction processing remain stable, but consulting is more sensitive to discretionary pullbacks, particularly in government contracts.
• Wamsi Mohan (Bank of America): Sought clarity on how IBM expects to achieve its full-year growth target given segment trends. CFO Jim Kavanaugh outlined that the new mainframe launch, Red Hat momentum, and acquisitions like HashiCorp are expected to offset consulting caution.
• Amit Daryanani (Evercore ISI): Inquired about the impact of federal consulting volatility and the rationale for providing quarterly revenue guidance. Management explained that federal consulting is less than 10% of the consulting segment and cited increased transparency due to currency volatility.
• Ben Reitzes (Melius Research): Questioned the sequential deceleration in Red Hat growth and drivers behind future acceleration. Management highlighted strong bookings and the role of virtualization and containerization as key growth levers for Red Hat.
• Erik Woodring (Morgan Stanley): Asked why higher revenue from currency tailwinds isn’t reflected in increased free cash flow guidance. Management responded that they are maintaining a conservative posture early in the year, focusing on durable EBITDA growth and disciplined execution.

Catalysts in Upcoming Quarters

In the quarters ahead, the StockStory team will be tracking (1) the market reception and adoption rate of IBM’s z17 mainframe and its impact on infrastructure revenue, (2) sustained momentum in Red Hat and recurring software revenue to confirm the durability of software-led growth, and (3) consulting backlog trends and client decision-making patterns as indicators of broader enterprise IT spending. Progress in integrating recent acquisitions and expanding generative AI client deployments will also be important markers.

IBM currently trades at a forward P/E ratio of 21.3×. Is the company at an inflection point that warrants a buy or sell? Find out in our free research report.

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