IBM Preview: Can Big Blue continue its impressive run?
3min read IBM is set to report its Q3 2024 earnings after the close on Wednesday, with analysts expecting EPS of $2.23 on $15 billion in revenue. This would represent year-over-year growth of 24% in earnings and 2.2% in revenue. Investors will also be closely watching IBM's operating income, expected at $2.6 billion, and its free cash flow outlook, which has already been raised above $12 billion for the full year. The company has performed well recently, with AI being a major driver of optimism. However, the key question remains whether IBM can maintain momentum in its Software and Consulting segments amidst broader macroeconomic challenges.
One of the key things to watch in IBM’s report will be updates on its AI initiatives, which have generated $2 billion in bookings so far. The company's AI business mix includes 75% Consulting and 25% Software signings, and AI remains a significant opportunity, especially with its generative AI strategy gaining traction. Additionally, IBM’s acquisition of HashiCorp and integration of assets from Software AG, such as StreamSets and WebMethods, will likely be discussed. Analysts will be interested in IBM’s strategy around these acquisitions, which are expected to contribute significantly to growth in the coming years.
In terms of stock performance, IBM has rallied 70% over the past 12 months, reaching record levels and breaking above an 11-year base of $213-$215 in September 2024. This recent strength has been driven by enthusiasm around AI and IBM’s ability to improve its revenue growth and free cash flow generation. Shares traded slightly higher on Tuesday, buoyed by positive results from enterprise technology competitor SAP. The stock is currently hovering around $231 ahead of the earnings report.
The Software segment will be a focal point in IBM’s earnings call. Analysts are expecting continued outperformance, especially from Red Hat, which saw annual bookings growth of over 20% in Q2 and is expected to contribute strongly to the Q3 results. A strong Software division, driven by AI and hybrid cloud demand, could further push IBM’s stock higher. Investors will also be looking for any updates on IBM’s z16 mainframe cycle, which has shown unexpected strength late in its cycle, contributing to Infrastructure segment growth.
However, there are some concerns regarding IBM’s Consulting business, which has faced softness due to a pullback in discretionary projects and weaker macroeconomic conditions. Consulting revenue was flat year-over-year in Q2, and analysts will be watching to see if IBM can reverse this trend in Q3. Consulting is a crucial area for IBM, especially with its growing AI-driven services, so any sign of improvement or further weakness will be a key factor in how the market reacts.
IBM’s guidance for Q4 and beyond will also be critical. Analysts are expecting $3.76 in EPS, $4.3 billion in operating income, and $17.9 billion in revenue for Q4, which is typically IBM’s strongest quarter. Additionally, for full-year 2025, the consensus stands at $10.72 in EPS and $66.3 billion in revenue, representing 5% growth. Investors will be eager to hear any updates on these projections and how IBM plans to manage its growth trajectory, particularly as AI becomes a bigger part of its strategy.
Another point of interest will be IBM’s free cash flow generation. The company has significantly reduced its capital expenditures in recent years, which has improved its free cash flow. Analysts will be watching for any signs that IBM may resume share repurchases, given its growing cash flow. However, with IBM trading at around 23x EPS, it will need to demonstrate consistent growth to justify its current valuation and maintain investor confidence.
On September 5, 2024, IBM and State Street Global Advisors entered into an agreement with Prudential to transfer approximately $6 billion of defined benefit pension obligations to Prudential via a nonparticipating single premium group annuity contract. The purchase, which closed on September 11, 2024, covers around 32,000 participants and beneficiaries, with Prudential assuming responsibility for pension payments starting January 1, 2025. There will be no changes to the benefits for those participants. The transaction was fully funded by the Plan's assets, with no cash contribution from IBM. As a result, IBM expects to record a one-time non-cash pre-tax pension settlement charge of approximately $2.7 billion ($2.0 billion net of tax) in Q3 2024, which will not impact its operating profit or free cash flow for the period.
IBM posted a strong Q2 earnings report, highlighted by a significant EPS beat, its largest since Q4 2020, and a 1.9% year-over-year revenue increase to $15.77 billion, exceeding expectations. The company raised its FY24 free cash flow guidance to over $12 billion and reaffirmed its constant currency revenue growth outlook, aligning with its mid-single-digit model. Software and Infrastructure segments performed well, with Software growing 8.4% in constant currency (CC) to $6.7 billion, driven by Hybrid Platform & Solutions (+6% CC) and Transaction Processing (+13% CC). Red Hat also saw impressive growth, with annual bookings up over 20% and OpenShift bookings increasing by over 40%. Infrastructure revenue rose 2.7% CC to $3.6 billion, supported by strong demand for IBM Z, which continues to outperform expectations two years into the z16 cycle.
However, IBM’s Consulting segment was softer, with revenue growing only 1.8% CC to $5.2 billion and declining 0.9% in actual dollars. The segment was impacted by clients pulling back on discretionary projects due to inflation and higher interest rates, affecting decision-making timelines. Despite this, IBM reported strong momentum in generative AI, with a business pipeline exceeding $2 billion, driven largely by Consulting signings. IBM’s focus on AI was a major theme in the quarter, with the company leveraging AI across its products and services, from Software to Infrastructure and Consulting. The raised free cash flow guidance and strong AI initiatives reflect IBM’s positive outlook, signaling strength in technology spending as the company moves forward.
In conclusion, IBM’s Q3 2024 earnings report is set to be a crucial event for the company as it navigates growing expectations around AI and its broader business transformation. Investors will be looking for continued strength in the Software segment, potential improvements in Consulting, and further clarity on IBM’s outlook for Q4 and 2025. With the stock already at record levels, meeting or exceeding expectations will be key to sustaining its recent momentum.
