INTERNATIONAL BUSINESS MACHINES CORP Q1 FY2025 earnings call

• Strong start in 2025 with solid revenue growth, profitability, and cash flow generation driven by hybrid cloud and AI strategy. - Growth led by software, with Red Hat, automation, data, and transaction processing contributing. - Early leadership in generative AI with book of business over $6 billion inception to date. - Announced launch of z17 with enhanced AI acceleration, security features, and usability tools. - Closed acquisitions of HashiCorp and AST. - Focused on accelerating innovation speed and impact, with quantum partnership milestone. - Driving productivity initiatives by transforming enterprise operation, optimizing supply chain, and rightsizing infrastructure, resulting in margin expansion and high free cash flow.

In the first quarter, software was up 9% at constant currency, driven by 15% growth in automation, 13% in Red Hat, 7% in data, and 2% in transaction processing. Software's annual recurring revenue grew to $21.7 billion, up 11% since last year. Consulting revenue was flat with solid backlog growth of mid-single digit. Strategy and technology revenue declined 1%, and intelligent operations revenue was flat. Infrastructure revenue declined 4%, with hybrid infrastructure down 7% (IBM z down 14%) and distributed infrastructure down 4%, but storage delivered double-digit growth.

• Maintained full-year guidance for accelerating revenue growth to 5% plus and above $13.5 billion of free cash flow. - Expect software to have mid-teens growth with Red Hat expected to grow mid-teens. - Cautious on consulting's contribution given current environment but encouraged by sequential growth and backlog. - Expect infrastructure to grow with new mainframe launch. - Full-year operating pretax margin expected to expand by over a half a point, tax rate in mid-teens. - Expect revenue growth of at least 4% at constant currency for second quarter with a range of $16.4 billion to $16.75 billion, and second-quarter operating pretax margin expansion consistent with full year.

• Uncertainty in macro environment may cause clients to pause and take wait-and-see approach, affecting discretionary projects and in-period signings. - Consulting is more susceptible to discretionary pullbacks and Doge-related initiatives. - Consumption-based services and software, including in Red Hat, and areas of distributed infrastructure could see greater variability if macroeconomic environment deteriorates. - Currency volatility could impact revenue and financial results. - Potential impact of tariffs and supply chain dynamics on margin and cash flow.

Q: Jim Schneider with Goldman Sachs asked about macro impact on software and consulting, sub-segment guidance.

A: Arvind Krishna and Jim Kavanaugh responded on macro effects, software growth drivers, consulting caution.

Q: Wamsi Mohan with Bank of America asked about getting to 5% plus guide, Red Hat comps, transaction processing, consulting contribution.

A: Jim Kavanaugh discussed strategic investment thesis, software growth, Red Hat momentum, infrastructure innovation.

Q: Wamsi Mohan with Bank of America followed up.

A: Jim Kavanaugh elaborated on software, Red Hat, consulting.

Q: Amit Daryanani with Evercore ISI asked about consulting federal business, macro noise, June quarter guide.

A: Jim Kavanaugh and Arvind Krishna talked about consulting federal business size, macro impact, June quarter guide reasoning.

Q: Ben Reitzes with Melius Research asked about Red Hat deceleration, virtualization driver.

A: Jim Kavanaugh and Arvind Krishna discussed Red Hat performance, virtualization growth.

Q: Erik Woodring with Morgan Stanley asked about free cash flow guide, FX impact.

A: Jim Kavanaugh explained free cash flow generation, FX hedging.

Q: Brian Essex with JPMorgan asked about mainframe cycle macro impact, balance sheet risk.

A: Arvind Krishna and Jim Kavanaugh talked about mainframe cycle expectations, balance sheet management.

Q: Matt Swanson with RBC Capital Markets asked about Gen AI ROI in challenging macro.

A: Arvind Krishna discussed shift in Gen AI conversations to ROI-focused application.

Q: Param Singh with Oppenheimer and Company had no response