Arvind Krishna, chief executive of the International Business Machines Corporation (IBM), during a television interview in San Francisco, California, July 13, 2022.
David Paul Morris | Bloomberg | Getty Images
IBM shares fell as much as 4% in extended trading on Monday after the company cut its cash forecast for 2022. It still beat on the top and bottom lines.
Here’s how the company did it:
- Earnings: $2.31 per share, adjusted, versus the $2.27 per share expected by analysts, according to Refinitiv.
- Income: $15.54 billion, versus $15.18 billion as expected by analysts, according to Refinitiv.
IBM’s revenue rose 9% year over year in the quarter, according to a statement. Income from continuing operations rose to $1.47 billion from $810 million in the year-ago quarter. IBM spun off its managed infrastructure services business into publicly traded Kyndryl in November, and sales to Kyndryl boosted IBM’s revenue.
“We’re planning for about five to six points of revenue growth in Kyndryl sales in 2022,” Jim Kavanaugh, IBM’s chief financial officer, said on a conference call with analysts.
Management called for $10 billion in free cash flow for all of 2022, down from the $10 billion to $10.5 billion range it offered in April. Kavanaugh blamed the strong dollar and the suspension of business in Russia.
“This was a very profitable business for us and will be worth several hundred million dollars in free cash flow and earnings in 2022,” he said.
Executives reiterated their plan for constant-currency revenue growth at the high end of their mid-single-digit guidance for the year. The currency weighed on reported earnings by more than 6% of the increase, or $900 million, which was $200 more than spot rates had indicated three months ago, Kavanaugh said.
IBM reported $6.17 billion in software revenue in the second quarter, up 6% but below the consensus of $6.3 billion among analysts polled by StreetAccount.
The company’s consulting division generated $4.81 billion in revenue, up nearly 10% and beating the StreetAccount consensus of $4.67 billion.
IBM’s infrastructure unit, which includes mainframe computers, contributed $4.24 billion in revenue, up nearly 19% and well above the StreetAccount consensus of $3.79 billion. On May 31, IBM began selling its latest mainframe, the z16. Each mainframe cycle generally brings revenue growth at first as customers improve, followed by a decline. Sales of z Systems products rose 69%, compared to a 19% decline in the first quarter.
Also in the quarter, IBM announced a plan to acquire cybersecurity startup Randori and Francisco Partners closed its acquisition of IBM’s Watson healthcare data and analytics assets in a deal said to be worth more than $1 billion.
IBM’s gross margin narrowed to 53.4% from 55.2% in the year-ago quarter. The company said the competitive job market weighed on results in its consulting arm, continuing a trend it saw earlier in the year. The company has worked to deal with this by charging higher fees on contracts and expects a full pre-tax margin of 9% to 10%, which would be up 1 percentage point year over year.
“Consulting, which makes up more than half of IBM’s workforce, is most affected by an inflationary labor market and rising labor costs as we bring new talent on board and increase capacity,” Kavanaugh said. “We’re starting to capture the reality of these higher costs in our pricing, but given the time from contract signing to revenue realization, it’s taking a while to see it in our margins.”
Before the after-hours move, IBM shares were up 3% so far this year, while the S&P 500 index was down about 20%.
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