IBM gets lift from software, AI demand as consulting slips

By Arsheeya Bajwa

(Reuters) -IBM beat analysts' estimates for second-quarter revenue and raised its annual growth forecast for its software business on Wednesday, riding on higher AI-linked spending by clients looking to adopt the technology.

The company has focused on expanding its Watsonx platform that allows users to deploy chatbots or enhance code for AI programs, while also making its Granite family of AI models open-source to help popularize its AI services.

Big Blue's shares rose about 3% in extended trading, set to add to their year-to-date gains of about 12% from a rally in stocks of AI-linked companies.

Software revenue increased about 7% to $6.74 billion in the quarter. The 113-year-old company now expects the segment to grow at a high-single-digit percentage in 2024, compared to its prior forecast of slightly above the high end of mid-single digit percentage.

The company's AI Book of Business - a combination of bookings and actual sales across various products - grew to $2 billion, of which about $1 billion was added in the second quarter.

"The commercialization of Generative AI is accelerating, positioning diversified enterprise technology companies like IBM to capitalize on the growing demand for AI integration," said Tejas Dessai, a research analyst at Global X.

Meanwhile, IBM lowered its expectations for annual consulting revenue, estimating growth in low-single-digit percentages compared to its prior forecast of 6%-8%.

Consulting revenue fell about 1% to $5.18 billion in the second quarter, as clients cut back on discretionary spending and short-term consulting projects amid higher-for-longer interest rates and inflationary pressures.

"You're seeing an overall very dynamic macroeconomic environment, and underneath that, clients are choosing technology for competitive advantage. They are spending on GenAI," Chief Financial Officer James Kavanaugh told Reuters.

"But they are making trade-off decisions and spending reprioritizations, and you see that play out within consulting."

Companies have prioritized spending on longer-term consulting projects centered on their AI businesses - revenue from which is yet to be reflected in IBM's books.

IBM reported revenue of $15.77 billion, compared with analysts' average estimate of $15.62 billion, according to LSEG data.

Second-quarter adjusted profit of $2.43 per share beat estimates of $2.20, helped by robust sales in the high-margin software business.

(Reporting by Arsheeya Bajwa in Bengaluru; Editing by Sriraj Kalluvila)