AI mainframe sales help IBM breeze past the Street’s targets on earnings and revenue

IBM Corp. beat expectations on second-quarter earnings and revenue today, aided by strong sales of new mainframe hardware that’s capable of processing vast amounts of data, making it useful for artificial intelligence workloads.

The company reported earnings before certain costs such as stock compensation of $2.80 per share, easing past Wall Street’s target of $2.64 per share. Revenue for the period rose 8%, to $16.98 billion, ahead of the $16.59 billion analyst consensus estimate. That represents a strong rebound, after the company recorded revenue growth of just 1% in the first quarter.

All told, IBM delivered net income of $2.19 billion, up from $1.83 billion in the year-ago period.

On a conference call with analysts, IBM Chief Executive Arvind Krishna (pictured) said geopolitical tensions continue to keep some of its customers from moving cautiously, though he said that was not a major factor overall. “U.S. federal spending was also somewhat constrained in the first half, but we do not expect it to create long-term headwinds,” he added.

One blip on IBM’s results sheet was software revenue, which increased 10%, to $7.39 billion, in the quarter, but fell short of the Street’s $7.43 billion target. On the other hand, IBM’s hybrid cloud revenue, which includes sales from Red Hat, grew by 16%, just ahead of estimates.

The reason for the lower software revenue is that many clients have “reprioritized their spend to hardware,” Krishna told analysts. The CEO explained that a growing number of enterprises have switched their focus to spending on AI infrastructure expansion, due to uncertainties around macroeconomic and trade conditions.

IBM said its generative AI book of business, which combines bookings with actual sales across various AI products and services, rose to $7.5 billion in the quarter, up from $6 billion in April. The company has made a big effort to attract AI developers. One of its most recent announcements is a new service called watsonx Orchestrate, which it says enables businesses to build autonomous AI agents that can perform tasks without human supervision in less than five minutes

Meanwhile, revenue from IBM Consulting inched up 3%, to $5.31 billion, coming in ahead of the Street’s forecast of $5.16 billion. Companies are increasingly looking for help as they struggle to integrate AI into their systems alone. They’re also looking to streamline their information technology operations so they can act more swiftly in the rapidly evolving economic environment, Krishna said.

The company reported infrastructure revenue of $4,14 billion, up 14% from a year ago and well above the consensus estimate of $3.75 billion.

During the quarter, IBM launched the latest generation of its venerable mainframe computer, the IBM z17, which features more advanced processors geared toward running generative AI workloads and financial applications. It went on sale in early June, and helped to boost the company’s sales, officials said, though the company didn’t provide an exact figure.

IBM did not offer any guidance for the third quarter, in line with its standard practice. The company broke with tradition in April and offered investors a one-off outlook on revenue, due to the uncertainty around U.S. President Donald Trump’s tariffs policy at the time. But it didn’t feel the need to do so today.

However, the company reiterated it’s still looking for more than $13.5 billion in free cash flow in fiscal 2025, as it said three months earlier. For the full year, it’s looking for revenue growth of around 5% at constant currency rates.

IBM Chief Financial Officer Jim Kavanaugh told analysts on the call that the company is also hopeful it can expand its business through new acquisitions. “What we’ve seen over the last four months has made us optimistic that we are now in a rational regulation environment where M&A that makes sense will get approved in reasonable timeframes,” he said.

Although the results were largely positive, investors were apparently hoping for some more convincing numbers, and IBM’s stock fell more than 5% in extended trading on the back of the report. That said, it remains one of the better-performing tech stocks this year, still up 28% in the year to date.

Photo: SiliconANGLE