Categories Analysis, Technology

Important takeaways from IBM’s first-quarter 2024 earnings report

According to the management, the company is on track to achieve its free cash flow target of $12 billion this year

International Business Machines Corporation (NYSE: IBM) this week reported mixed results for the first three months of fiscal 2024, with earnings beating and revenues missing analysts’ estimates. After spinning off its legacy business a few years ago, the tech firm has been focused on expanding the cloud business and its AI portfolio more recently.

IBM’s stock suffered a big selloff soon after the earnings announcement, with the revenue miss and management’s cautious guidance weighing on investor sentiment. Particularly, there are concerns about the weakness in the company’s consulting business. The stock, which set a new record about a month ago, has stayed above the 52-week average so far this year. Considering IBM’s growing footprint in the cloud market and aggressive AI push, the stock looks undervalued right now.

Earnings Beat

Revenues increased to $14.46 billion in the first quarter from $14.25 billion in the prior year period but fell short of expectations. Adjusted profit from continuing operations moved up to $1.68 per share in Q1 from $1.36 per share in the first quarter of 2023. Earnings topped expectations, as they did in almost every quarter in the past eight years. On an unadjusted basis, the March-quarter net profit was $1.61 billion or $1.72 per share, compared to $927 million or $1.01 per share in the corresponding period last year.

IBM ended the quarter with an impressive operating cash flow of $4.2 billion, reflecting the strength of its diversified business model. The management has exuded confidence that the company is on track to achieve its $12-billion free cash flow target for the year. IBM executives continue to expect revenue growth to be consistent with the company’s mid-single-digit model in fiscal 2024, on a constant-currency basis. At the current exchange rates, the currency will likely be about a one-and-a-half to two-point headwind to revenue growth.

Growth Initiatives

The healthy cash position will allow the business to continue investing in growth initiatives, including the ongoing expansion of cloud and AI capabilities. Recently, the company revealed plans to acquire infrastructure cloud company HashiCorp for $6.4 billion to create a comprehensive end-to-end hybrid cloud platform. The addition of HashiCorp builds on the acquisition of RedHat about five years ago, by extending the latter’s hybrid cloud capabilities to provide a more streamlined end-to-end automated infrastructure and security lifecycle management.

“As generative AI deployment accelerates alongside traditional workloads, developers are working with increasingly heterogeneous, dynamic, and complex infrastructure strategies. HashiCorp has a proven track record of helping clients manage the complexity of today’s infrastructure by automating, orchestrating, and securing hybrid and multi-cloud environments. HashiCorp is a great strategic addition to our portfolio, extending Red Hat’s hybrid cloud capabilities to provide end-to-end automated infrastructure and security lifecycle management,” said IBM’s chief executive officer Arvind Krishna in his post-earnings interaction with analysts.

Extending the post-earnings downturn, shares of IBM traded lower in the early hours of Friday, after closing the previous session sharply lower. They have lost about 11% in the past 30 days.

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