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    International Business Machines Corp (IBM)

    Q1 2024 Summary

    Published Jan 10, 2025, 5:10 PM UTC
    Initial Price$162.83January 1, 2024
    Final Price$189.83April 1, 2024
    Price Change$27.00
    % Change+16.58%

    What went well

    • IBM's Software segment accelerated growth to 6% overall in Q1, with Red Hat revenue up 9% and OpenShift bookings growing nearly 40%, positioning the company for double-digit growth for the full year. ,
    • IBM's AI book of business has surpassed $1 billion, with Consulting's Gen AI book of business in Q1 doubling all of last year's total, indicating strong demand and growth potential in AI services. ,
    • The acquisition of HashiCorp is expected to be accretive to adjusted EBITDA within the first 12 months and free cash flow accretive by year 2, enhancing IBM's hybrid cloud and AI capabilities and accelerating their revenue growth profile. , ,

    What went wrong

    • Consulting revenue growth decelerated to 2% in the first quarter, with guidance reduced from 6-8% to mid-single digits, indicating pressure on consulting revenue due to lengthening backlog duration and reduced revenue realization as clients tighten discretionary spending.
    • Software growth lags the overall market, as IBM's software business has been growing between 3% and 9%, whereas the overall market seems to be growing faster, raising concerns about unlocking its full potential.
    • IBM has spent $16 billion on acquisitions since 2021, including HashiCorp for $6.4 billion, raising questions about over-reliance on M&A for growth and whether these acquisitions are delivering the expected return, especially as some acquisitions may be dilutive in the near term.

    Q&A Summary

    1. Reduced Consulting Growth Outlook
      Q: Why did you lower consulting growth guidance?
      A: IBM reduced its consulting growth outlook from 6–8% to 5%, impacting about 60 basis points of company growth. Despite this adjustment, they maintain mid-single-digit revenue growth guidance, expecting software growth to offset the slowdown in consulting.

    2. HashiCorp Acquisition Synergies
      Q: What are the financial impacts of the HashiCorp acquisition?
      A: IBM expects the HashiCorp acquisition to be adjusted EBITDA accretive in the first 12 months and levered free cash flow accretive by the end of year two. They anticipate significant cost synergies, aiming to increase HashiCorp's free cash flow margin from mid-single-digit to about 30–40% within a few years. The acquisition strategically fits IBM's portfolio, providing tremendous synergistic value to their hybrid cloud AI offerings.

    3. Red Hat Growth and HashiCorp Impact
      Q: How will HashiCorp affect Red Hat's growth?
      A: While HashiCorp complements Red Hat, it is not included in Red Hat's current growth figures. Red Hat accelerated to 9% growth this quarter, up from 7%, with OpenShift bookings growing over 40%. HashiCorp enhances IBM's software strategy, making the portfolio more attractive, but Red Hat's growth is strong independently.

    4. Software Growth Potential
      Q: How can IBM unlock more software growth?
      A: IBM has progressed from a flat software portfolio to expected growth north of 6% this year. By focusing on organic innovation and strategic acquisitions, they aim to improve year-over-year growth. They are working to increase software growth beyond current levels while maintaining important but slower-growing segments like mainframe software.

    5. M&A Strategy and Future Plans
      Q: Will you pursue more M&A beyond prior plans?
      A: IBM remains disciplined in its M&A strategy, focusing on acquisitions that meet strategic goals, offer synergies, and are financially accretive within two years. They are committed to investing in the business while maintaining dividends and investment-grade ratings, with flexibility to explore additional opportunities.

    6. AI-Centric Backlog and Consulting
      Q: What is happening with consulting revenues and AI backlog?
      A: Despite a deceleration in consulting revenue growth to 2% this quarter , IBM sees strong demand in digital transformation and Gen AI, with an AI-centric backlog exceeding $1 billion. They expect consulting growth to accelerate throughout the year, leveraging a strong backlog and focusing on key growth areas.

    7. Red Hat Pipeline and VMware Impact
      Q: Are you benefiting from VMware's acquisition?
      A: Clients are choosing platforms for the next 10–20 years, and IBM sees increased interest in Red Hat’s solutions like OpenShift and virtualization offerings. While not directly related to VMware, the addition of HashiCorp will enhance Red Hat's portfolio, accelerating growth by improving infrastructure management across environments.

    8. Enterprise Pain Points in Gen AI
      Q: What challenges do clients face with Gen AI?
      A: Enterprises are concerned about the economics and ROI of running Gen AI models. IBM assists clients in addressing high infrastructure costs, offering cost-effective solutions like the Granite series models to improve ROI. They advise focusing on scalable use cases that significantly impact productivity and revenue.

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