IBM's profit surges on strong software and consulting business

Company’s net income rose to more than $1.5bn in the three months to the end of June

IBM's revenue dropped about 0.4 per cent in the second quarter to $15.48 billion. EPA

IBM reported a 14 per cent jump in second-quarter net profit, driven by the company's strong performance in its software and consulting divisions.

The company’s net profit rose to $1.6 billion in the three-month period to the end of June, compared to the same period a year earlier, the company said in a regulatory filing on Wednesday.

Revenue dropped about 0.4 per cent during the quarter to $15.48 billion from a year earlier, missing analysts’ expectation of $15.58 billion.

The company's shares closed almost 1 per cent up to $135.48 at the end of trading on Wednesday, but dropped about 1 per cent in after hours trading.

“Organisations are using our hybrid cloud and AI [artificial intelligence] technology, and our consulting capabilities, to transform their operations,” said Arvind Krishna, IBM’s chairman and chief executive.

“We continue to respond to the needs of our clients who seek trusted, enterprise AI solutions … we remain confident in our revenue and free cash flow growth expectations for the full year.”

To strengthen its position in generative AI market, IBM launched a new platform, watsonx, in May. The company said it would help companies to use the most advanced capabilities of the technology in an easy and secure manner.

IBM’s consulting arm, which included business transformation, technology consulting and application operations, contributed $5 billion in the second quarter, almost 4.3 per cent more than the prior year period.

Its software business added about $6.6 billion in the second quarter, up by about 7.2 per cent year on year. The company’s software business includes hybrid platforms and solutions, automation, data, AI and security.

The infrastructure division earned $3.6 billion in sales, nearly 14.6 per cent down on a yearly basis.

Financing, which includes clients and commercial financing, generated $200 million, up 26.2 per cent annually.

The New York-based company expects revenue growth of 3 per cent to 5 per cent in the 2023 full financial year. It predicts about $10.5 billion in free cash flow, up more than $1 billion yearly, during the period.

In the second quarter, the company generated net cash from operating activities of $2.6 billion, up $1.3 billion on an annual basis. IBM’s free cash flow stood at $2.1 billion as of June 30.

IBM said it ended the second quarter with $16.3 billion of cash and marketable securities, up $7.5 billion from December last year.

“In the quarter, revenue performance was led by our growth vectors of software and consulting, and we continued to expand our gross profit margin, driven by our improving portfolio mix and productivity initiatives,” said James Kavanaugh, IBM’s senior vice president and chief financial officer.

“This year we have leveraged our strong cash position to invest for growth, announcing seven acquisitions to bolster our hybrid cloud and AI strategy, while continuing to return value to shareholders through dividends.”

The company returned $1.5 billion to shareholders in dividends in the second quarter.

The company’s debt, including IBM financing debt of $10.6 billion, totalled $57.5 billion as of June 30. It was up by nearly $6.5 billion since the end of 2022.

“IBM continues to make progress on its massive multiyear restructuring,” Jesse Cohen, senior analyst at Investing.com, a financial markets platform that has offices in the US, China, Spain and South Korea, told The National.

“IBM is poised to continue to benefit from its turnaround efforts, while taking advantage of strong demand for its hybrid cloud offerings, which will help power future earnings growth and allow it to focus on increasing shareholder returns.”