INTERNATIONAL BUSINESS MACHINES CORP (IBM)·Q1 2025 Earnings Summary

Executive Summary

• IBM delivered a clean beat on both revenue and EPS: revenue $14.54B vs $14.39B consensus (+$0.15B), and operating EPS $1.60 vs $1.43 consensus; GAAP EPS was $1.12. Management highlighted software-led growth and strong gross margin expansion; free cash flow was $2.0B for the quarter . EPS and revenue consensus figures marked with an asterisk are from S&P Global estimates.*
• Mix shift to Software and productivity drove margin leverage: total gross margin expanded 170 bps YoY to 55.2% GAAP (56.6% operating, +190 bps YoY), with Software segment profit margin up ~370 bps YoY and Consulting up ~280 bps YoY .
• FY25 guidance maintained: at least 5% constant-currency revenue growth and about $13.5B free cash flow; Q2 revenue guided to $16.40–$16.75B (implying ≥4% CC growth). FX shifted from a FY25 headwind to a 1.0–1.5 pt tailwind to reported growth .
• Strategic catalysts build into 2H: z17 mainframe launched in April with materially higher on-chip AI inferencing; mgmt expects Infrastructure to grow in 2025 with the new cycle. Generative AI “book of business” rose to >$6B (up >$1B q/q), supporting Software and Consulting momentum .

What Went Well and What Went Wrong

• What Went Well

  • Software outperformed: revenue +7% YoY (+9% CC) to $6.34B with broad-based strength across Red Hat (+12%/+13% CC), Automation (+14%/+15% CC), and Data (+5%/+7% CC). Software ARR reached $21.7B, +11% YoY, with OpenShift ARR at $1.5B (~25% growth) .
  • Margin expansion and FCF quality: operating gross margin +190 bps YoY to 56.6%; adjusted EBITDA $3.4B (+12% YoY), and mgmt cited the “highest first quarter free cash flow margin in reported history” on $2.0B FCF .
  • Clear AI traction: Generative AI book of business >$6B inception-to-date, up >$1B in the quarter; mgmt emphasized ROI-focused AI deployments and strong client interest across software assistants/agents and consulting .

• What Went Wrong

  • Consulting softness and macro caution: Consulting revenue -2% YoY (flat CC); mgmt flagged discretionary pullbacks and U.S. federal DOGE-related impacts, while remaining cautiously prudent on Consulting’s FY contribution (backlog +6%) .
  • Infrastructure down ahead of new cycle: segment revenue -6% YoY as z16 wrapped; IBM Z -15% YoY (CC -14%). Segment margin declined ~150 bps YoY on product cycle dynamics .
  • FX/tariff volatility requires vigilance: while FY FX is now a tailwind, mgmt detailed extreme currency moves and reiterated hedge mechanics; tariff exposure limited (U.S.-imported goods <5% of overall spend), but they are evaluating alternatives as needed .

Financial Results

Headline metrics and trends

Versus S&P Global consensus

Segment revenue breakdown

Select KPIs

Non-GAAP adjustments (Q1 2025): Operating EPS of $1.60 reflects ~$0.45 acquisition-related and ~$0.04 retirement-related adjustments vs GAAP EPS of $1.12 .

Guidance Changes

Earnings Call Themes & Trends

Management Commentary

• “We exceeded expectations for revenue, profitability and free cash flow in the quarter, led by strength across our Software portfolio… our book of business stands at more than $6 billion inception-to-date, up more than $1 billion in the quarter.” — Arvind Krishna, CEO .
• “We delivered $14.5 billion in revenue… operating earnings per share of $1.60… $2 billion of free cash flow, our highest first quarter free cash flow margin in reported history.” — Jim Kavanaugh, CFO .
• “Goods imported to the U.S. represent less than 5% of our overall spend, and under current U.S. tariff policy, the impact to IBM is minimal.” — Jim Kavanaugh, CFO .
• “With our new mainframe launch… we expect Infrastructure to grow.” — Jim Kavanaugh, CFO .

Q&A Highlights

• Macro and segment sensitivity: Mgmt did not see 1Q slowdown in consumption portions of Software; Transaction Processing has tailwinds. Consulting is more susceptible to discretionary pullbacks; federal (‘DOGE’) exposure is <10% of Consulting and <5% of IBM revenue, with only a handful of impacted SOWs (<$100M backlog over multiple years) .
• Red Hat dynamics and virtualization: Red Hat grew ~13.5% in Q1; consumption moderated to high single digits from low-mid teens in Q4, but bookings remained high-teens for the seventh consecutive quarter; virtualization bookings already >$200M annualized with pipeline >$0.5B .
• FX and FCF guide: Despite FX turning from a headwind to tailwind, IBM maintained its ~$13.5B FCF guide, citing prudence and hedge wrap effects; FCF will be driven primarily by double-digit adjusted EBITDA growth .
• Mainframe cycle financing: IBM is comfortable leasing hardware/software via its financing arm to ease client CapEx; expects a very strong z17 cycle through 2025/1H26 .

Estimates Context

• Q1 2025 results beat S&P Global consensus on revenue and EPS: $14.54B actual vs $14.39B estimate; operating EPS $1.60 vs $1.427 estimate. Q4 2024 and Q3 2024 also exceeded EPS estimates, with Q3 revenue slightly below [GetEstimates].*
• Given maintained FY25 CC revenue growth (≥5%) and FCF ($13.5B) plus an explicit Q2 revenue range ($16.40–$16.75B; ≥4% CC), models will likely emphasize Software-driven mix and z17 ramp while keeping Consulting conservative .

Key Takeaways for Investors

• Software-led mix shift and productivity are expanding margins; operating EPS outperformance and cash conversion underpin the ~$13.5B FCF outlook .
• Red Hat momentum (mid-teens expected growth) and a growing virtualization pipeline should sustain Software growth and support cross-sell with Ansible/HashiCorp assets .
• z17 is a 2H tailwind; Infrastructure expected to grow in FY25 as the mainframe cycle turns, with enhanced AI inferencing and security as differentiators .
• Consulting remains the swing factor amid macro/federal caution; backlog +6% helps, but management is prudently conservative on FY contributions .
• FX has flipped to a tailwind to reported growth (1.0–1.5 pts), adding support to top-line optics even as IBM maintains CC growth guidance .
• Balance sheet/liquidity are solid post-HashiCorp (cash $17.6B; debt $63.3B); dividend was raised to $1.68/share, marking the 30th consecutive annual increase .
• Near-term trading: clean beat, maintained FY targets, and a new Q2 revenue range reduce uncertainty; watch for updates on z17 uptake and Consulting demand through the quarter .

Footnote: *Values retrieved from S&P Global.