IBM is ‘not projecting’ a recession or negative global domestic product (GDP) ‘from everything we can see and read,’ Krishna said on Wednesday’s call.
Solution providers navigating the tumultuous era of global tariffs and their potential effect on business spending on artificial intelligence–let alone IT overall–can find some positive and negative signs ahead from IBM’s first fiscal quarter earnings.
Executives with the Armonk, N.Y.-based vendor for mainframe, cloud, AI and other technology warned that consulting and some consumption-based software business is vulnerable should the economy take a negative turn.
But CEO Arvind Krishna and CFO Jim Kavanaugh struck optimistic tones for sales of the vendor’s new line of mainframes, its Red Hat subsidiary benefitting from disruption in the legacy virtualization market and flywheel effects from its Red Hat and consulting businesses. AI customer spending, meanwhile, appears strong.
IBM is “not projecting” a recession or negative global domestic product (GDP) “from everything we can see and read,” Krishna said on Wednesday’s call.
[RELATED: IBM Sets June Date for AI Agent Era z17 Mainframes]
IBM On Tariffs, AI
IBM beat expectations on revenue, consulting and infrastructure but missed on software, according to a Morgan Stanley report after the earnings call. Executives maintained their expected full-year growth expectation of 5 percent and full-year software growth of about 10 percent.
In an unusual move, the vendor shared second fiscal quarter revenue expectations between $16.4 billion and $16.75 billion, representing a 4 percent growth year over year.
Here are five takeaways from IBM’s latest quarterly earnings call.
Navigating Supply Chain Disruption
With global tariff spats potentially causing supply chain disruptions, Kavanaugh said that IBM “proactively took actions to bolster our supply chain ahead of our z17 launch, resulting in higher inventory levels.”
“Over the last several years, we have strategically diversified and streamlined our supply chain,” Kavanaugh said. “Goods imported to the U.S. represent less than 5 percent of our overall spend. And under current U.S. tariff policy, the impact to IBM is minimal.”
IBM is also “tactically evaluating alternative sources and other strategies to mitigate tariffs” where it affects the vendor overseas, he said. For clients that don’t want to spend capital on new mainframes, IBM has offered leasing for a long time worldwide, Krishna added.
That supply chain stabilization didn’t interrupt IBM’s free cash flow of $1.96 billion, the largest number for a first fiscal quarter in company history, according to a Wedbush report after earnings.
Krishna is optimistic on strong mainframe purchasing through 2025 and into the first half of 2026. Economic uncertainty also helps the business with capacity expansion earlier in the year to avoid overage pay.
IBM’s mainframe cycle should accelerate its software business and Red Hat business, Melius Research said in a report after the call. The firm expects “a big boost from the z17 mainframe in 2H25.”
The new mainframes could accelerate the transaction processing (TPP) business–which decelerated to 2 percent growth in the first fiscal quarter–to mid-single digit growth for the year, Bank of America said in its report after the earnings call.
Customers Are Still Buying AI
Although Kavanaugh said IBM is “seeing clients delay decision-making, especially in discretionary projects, which impacted our in-period signings” in IBM Consulting–No. 6 on CRN’s 2024 Solution Provider 500–overall, the vendor has “not seen a material change in client buying behavior,” Krishna said on the call.
IBM maintaining its full-year growth guidance signaled “minimal overall impact from the current environment on IBM customer spending plans,” Morgan Stanley said in a report after the call.
That appears to go for projects involving the vendor’s cutting-edge AI technology. IBM added another $1 billion-plus quarter over quarter to its generative artificial intelligence book of business–which now totals more than $6 billion, about a fifth of that software sales and the rest consulting.
AI spending is still considered “high priority” among “dozens of top CIOs, IT product managers, partners, and key enterprise decision makers” and not seeing cuts, Wedbush said in a report after IBM’s earnings call. AI projects are in motion, with about 15 percent of overall IT budgets influenced by or focused on AI. Cloud migrations should also continue.
“The good news is that we are still seeing very firm Cap-Ex intentions for 2025 as this AI Revolution is upon us and the use case enterprise phase is accelerating in many large scale AI strategic deployments,” according to the report. “C-level management know if they slow down these projects the strategic impact could be hard to recover from. This is an area of spending safety in a very turbulent IT spending backdrop in which ‘holding pattern’ is a common word being used in IT organizations around the world and especially in the US.”
As global tariff uncertainty plays out, Wedbush has seen about 25 percent of large-deal pipeline become regarded as lower-priority IT projects and “get pushed or paused as CIOs focus on already in motion IT endeavors as well as high priority purchases.”
“We expect Google, Microsoft, and Amazon to all give cloud guidance with significant caveats as the closure rates we are seeing on deals have no historical patterns and predicting the next few quarters is essentially playing darts blindfolded,” according to the report.
Wedbush named IBM, Palantir and Pegasystems as some of the best-positioned software vendors amid economic uncertainty. “We believe AI and cloud driven spending will be a high priority area during this uncertainty and software should outperform other subsectors of tech,” according to the report.
“We believe that IBM is well-positioned to navigate the macro storm and capitalize on the current demand shift for hybrid and AI applications with more enterprises looking to implement AI for productivity gains and drive long-term profitable growth,” Wedbush said in a separate report.
Shakiness In Software
The software miss was especially surprising when over the past four years, going into the first fiscal quarter, software usually grows by about $1.4 billion on average, according to a Morgan Stanley report. This time–despite the addition of HashiCorp, an acquisition that closed in February–software fell $1.6 billion quarter over quarter.
Its overall software business missed expectations, growing 9 percent year over year ignoring foreign exchange, according to Morgan Stanley.
IBM maintained its expected software full-year growth year over year of about 10 percent, but “our math suggests this is primarily a function of inorganic revenue contributions,” according to Morgan Stanley. The firm said organic software sales are decelerating from 8 percent growth year over year in the fourth fiscal quarter to 6 percent in the first fiscal quarter to about 6 percent in the second fiscal quarter.
Melius Research estimated that HashiCorp should add about $700 million to IBM’s business in 2025.
The software segment met Wall Street expectations of about $6.34 billion, according to Wedbush.
Red Hat Vulnerable, But Taking VMware Share
Krishna said that IBM did not see a slowdown during the quarter in its software consumption business in TPP and Red Hat.
In the event of negative global gross domestic product (GDP) and a recession, IBM could see “a small slowdown” in the Red Hat part of the software consumption business and a slowdown in the transaction processing business, Krishna said. Red Hat represents between 10 percent and 20 percent of IBM’s total business.
The Red Hat and transaction processing business growth deceleration surprised Morgan Stanley, the firm said in its report. It credited transaction processing deceleration “to lumpiness in large deals.”
Red Hat decelerated from 17 percent growth in the fourth fiscal quarter to about 13 percent in the first fiscal quarter, Melius Research said in a report after the call. The firm didn’t sweat the deceleration, calling it “expected” from non-recurring consumption revenue that represents about a fifth of Red Hat’s business.
“Overall Red Hat bookings are trending above revenues,” Melius said. “We are confident that Red Hat reaccelerates in the coming quarters to grow about 15% this year.”
IBM’s leadership called attention to Red Hat taking share in the virtualization space as customers of legacy VMware technology look to alternatives after the vendor changed pricing–similar to a change at virtual desktop vendor Citrix.
The disruption has led to the likes of Nutanix, Microsoft and Parallels also seeing customer interest in their technology.
“Virtualization, already, just the last couple quarters, we’ve already notched in over $200 million of annualized bookings,” Kavanaugh said. “We’ve been building a pipeline that is well north of half a billion dollars worth of virtualization.”
Red Hat grew about 13.5 percent year over year in the quarter and saw its seventh consecutive quarter of high teens annual contract value (ACV) bookings, Kavanaugh said. The virtualization, automation and Linux businesses grew double digits during the quarter.
Red Hat Enterprise Linux (RHEL) grew 13 percent year over year. OpenShift grew 23 percent and has $1.5 billion in annual recurring revenue (ARR). Ansible grew in the mid teens, the CFO said.
Red Hat OpenShift customers are also now looking to go beyond containerization and bring virtualization capabilities to their environments. IBM sees a flywheel that should also benefit Ansible and newly acquired HashiCorp, Krishna said.
The virtualization play isn’t just about taking out competitors, he said. “It is going to be much more about a platform. And people are making a decision, which platform can I depend upon for the next 10 to 20 years?”
Consulting Vulnerable, But Important
Krishna warned that “if there is pressure in the economy, consulting tends to see headwinds before other parts of the business.”
Kavanaugh said that IBM is still bullish on consulting continuing to grow 5 percent to 6 percent over the decade. Plus, consulting has a flywheel effect to the greater IBM business, acting as “the tip of the spear” in bringing customers to more offerings within the IBM product portfolio.
For the quarter, IBM Consulting was about flat year over year at $5.1 billion. That still represented growth quarter over quarter after consulting fell 1.1 percent the prior quarter. Strategy and technology consulting fell 1 percent. “Intelligent operations” was about flat.
First fiscal quarter consulting signings fell 9 percent year over year, according to Morgan Stanley.
However, the consulting signings decline comes after strong fourth quarter signings of 23 percent growth year over year, Melius Research said in a report after earnings.
Melius Research said in its report it has “low expectations” for IBM Consulting, expecting full-year flat growth year over year.
Last quarter, consulting brought in about $5.07 billion, missing Wall Street expectations of $5.05 billion, according to Wedbush.
