IBM Q1 FY25 Revenue Down 3.5% YoY, Services Business Up 1.5%

• IBM reports 1Q25 earnings presentation• Olympia McNerney leads the presentation• Arvind Krishna and Jim Kavanaugh present• Non-GAAP measures used in the presentation• Revenue and signings growth at constant currency• Reconciliation charts provided on the IBM investor website.

International Business Machines (IBM) released its first quarter 2025 earnings presentation on April 23, highlighting robust financial performance driven by its software segment and growing artificial intelligence (AI) business. Despite reporting better-than-expected results, IBM's stock retreated 4.71% in after-hours trading to $233.92, indicating investor skepticism about the company’s growth trajectory.

The tech giant reported revenue of $14.5 billion, representing a 2% year-over-year (YoY) growth, while generating $2.0 billion in free cash flow, the highest first-quarter free cash flow "in many years," according to company executives. The results come as IBM continues its transformation into a hybrid cloud and AI-focused enterprise technology provider.

Quarterly Performance Highlights

IBM exceeded its internal expectations across revenue, profitability, and cash flow metrics. The company’s adjusted EBITDA grew 12% YoY to $3.4 billion, with margin expansion of approximately 240 basis points. Gross margin expanded by 190 basis points while maintaining a strong cash position of $17.6 billion.

Arvind Krishna, IBM’s Chairman, President, and CEO, stated, "We exceeded our expectations across revenue, profitability, and cash flow." Krishna highlighted the company’s generative AI momentum, noting that IBM’s "book of business exceeds $6 billion inception-to-date, up more than $1 billion in the quarter."

James Kavanaugh, IBM’s SVP & CFO, emphasized "revenue growth led by Software, significant gross margin expansion, strong liquidity, solid free cash flow, and value return to shareholders" as key achievements for the quarter.

Segment Analysis

IBM’s software segment emerged as the standout performer, with 9% YoY revenue growth to $6.3 billion. The segment delivered impressive profit margin expansion of over 370 basis points, with strong performance in automation (15% growth) and hybrid cloud (13% growth).

The infrastructure segment saw a 4% revenue decline to $2.9 billion, which IBM attributed to "product cycle dynamics." The company announced its new IBM z17 mainframe system with multi-model AI capabilities, which could drive future growth in this segment as customers upgrade their systems.

AI and Strategic Initiatives

Generative AI remains a central focus of IBM’s strategy. The company reported that its AI book of business now exceeds $6 billion inception-to-date, growing by more than $1 billion in the first quarter alone. This acceleration suggests IBM is gaining traction in the competitive enterprise AI market.

The company’s recently announced IBM z17 mainframe incorporates multi-model AI capabilities, new security features, and improved usability tools, demonstrating IBM’s strategy to integrate AI across its product portfolio.

Financial Position and Outlook

IBM maintained a strong balance sheet with $17.6 billion in cash and marketable securities, though total debt increased to $63.3 billion, partly due to $7.1 billion in acquisitions during the quarter. Looking ahead, IBM maintained its full-year 2025 guidance, projecting revenue growth at constant currency to inflect higher to over 5%, operating pre-tax margin expansion of more than half a point, and full-year free cash flow of approximately $13.5 billion.

Market Reaction

Despite the positive results and maintained guidance, IBM’s stock fell 4.71% in after-hours trading following the earnings release. This decline contrasts with the company’s recent strong performance – the stock had gained 1.82% during regular trading hours on the day of the announcement, closing at $245.29.

The negative after-hours reaction may reflect investor concerns about the flat consulting performance, infrastructure segment decline, or questions about the sustainability of IBM’s AI growth. It’s worth noting that IBM’s stock had been trading near its 52-week high of $266.45 prior to the earnings release, suggesting high expectations were already priced in.

IBM’s Q1 2025 presentation paints a picture of a company successfully executing its software-led strategy with particular strength in AI initiatives. However, the market’s immediate reaction indicates investors may be looking for even stronger growth signals or may have concerns about specific segments before pushing the stock to new heights.

References
[1] https://www.investing.com/news/company-news/ibm-q1-2025-slides-software-growth-powers-earnings-beat-amid-market-skepticism-93CH-3999839
[2] https://finance.yahoo.com/news/q1-2025-international-business-machines-121552841.html

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