IBM beats forecasts and says it’s well-positioned to weather a trade war

Expressing confidence that it can weather the winds of an uncertain economic climate, IBM Corp. today reported revenue and earnings that beat analysts’ expectations and reaffirmed its guidance for the full fiscal year.

First-quarter earnings of $1.60 per share were down from $1.68 a year earlier but ahead of consensus estimates of $1.42. Revenue rose 0.5%, to $14.54 billion, beating expectations of $14.39 billion.

Growth was led by IBM’s software segment, which grew 9% in constant currency, to $6 billion. Software is now about 45% of IBM’s business, with an 80% recurring revenue rate. The hybrid cloud business led by Red Hat grew 13%, its seventh straight quarter of mid-teens percentage growth.

Automation revenue rose 15%, and data grew 7%. IBM’s consulting segment revenues were flat at $5.1 billion as “clients delay decision-making in discretionary projects,” according to Chief Financial Officer James Kavanaugh.

IBM is “cautious on consulting’s contribution this year” in light of customer uncertainty about the impact of the Trump administration’s fluctuating tariff policy, Kavanaugh said. However, he noted, “through the first three weeks of the second quarter, we have not seen any material change in client buying behaviors.” IBM expects its consulting business to grow between 5% and 6% per year for the foreseeable future and sees strategic value in its ability to drive infrastructure sales.

Chief Executive Arvind Krishna (pictured) noted that “consulting is more susceptible to discretionary pullbacks and DOGE-related initiatives,” referring to the Department of Government Efficiency. However, he said the effect on IBM’s overall business is expected to be modest.

“We process veterans’ benefit claims, we help process how the [General Services Administration] does procurement. We help implement payroll systems. I don’t think of these as optional,” he said. “We see them carrying on.”

Bullish forecast

IBM said it expects second-quarter revenue of between $16.4 billion to $16.75 billion, ahead of consensus forecasts of $16.31 billion. Despite the generally upbeat earnings report, IBM stock dropped more than 6% in early after-hours trading. Its stock is up nearly 12% this year while the S&P 500 has dropped more than 8%.

Reflecting a focus on cost controls, IBM reported a gross profit margin of 55.2% percent, up from 53.5% a year earlier. Its pre-tax income margin of 8% was up from 7.5%. Kavanaugh said the company has embedded artificial intelligence across more than 70 workflows and reduced spending by more than $1 billion through supply chain efficiencies.

“We exited 2024 at $3.5 billion of annual run rate savings, and we continue to see these efforts play out in our margin performance this quarter,” Kavanaugh said. “These actions create a flywheel that allows us to invest back in our business, increase our financial flexibility and deliver margin expansion.”

Executives said IBM is well-positioned to withstand a trade war, with just 5% of its spending on imported goods. Federal government contracts also constitute less than 5% of revenue.

“In the near term, uncertainty may cause clients to pause and take a wait-and-see approach,” said Chief Executive Arvind Krishna. “However, the value of hybrid cloud automation, data sovereignty and on-premises solutions becomes even more critical in volatile windows.” He said IBM is forecasting “a small slowdown [in gross domestic product], not a big slowdown.”

Minimal tariff impact

Kavanaugh said the impact of current U.S. tariff policies on IBM “is minimal. While we have limited direct exposure outside the United States, we are tactically evaluating alternative sources and other strategies to mitigate tariffs,” he said, causing inventories to rise about 10% in the quarter.

Executives also touted what they said was the company’s head start in AI, with over $6 billion in bookings to date and $1 billion in the last quarter. The AI business also has a flywheel effects as the infrastructure segment plays a larger role, as clients bring AI to their data, said Krishna said.

Infrastructure revenues of $2.9 billion were down 4%, mainly from a 14% drop in sales of the Z16 mainframe, which is at the end of its lifecycle and is due to be replaced next month.

The successor Z17 “delivers enhanced AI acceleration through multi-modal AI capabilities, new security features to protect data and tools that leverage AI for improving system usability,” Krishna said. “Its value proposition particularly resonated with clients, given significantly lower power requirements, higher capacity growth and increased performance.”

Photo: SiliconANGLE