On October 23, after the U.S. stock market closed, IBM released its Q3 earnings report. Total revenue was $14.968 billion, a slight year-over-year increase of 1%, but below analysts' expectations of $15.07 billion.

In Q3, IBM reported a net loss of $330 million, compared to a net profit of $1.704 billion in the same period last year, turning from profit to loss. IBM explained that the loss was primarily due to a one-time charge of approximately $2.7 billion related to the transfer of part of its pension plan to third-party insurer Prudential.

Breaking down the performance:

• IBM's software revenue for the third quarter was $6.524 billion, a 10% year-over-year increase.
• Consulting revenue declined by 0.5%.
• Infrastructure revenue dropped by 7%.

Key highlights of IBM’s Q3 2024 performance:

• Total revenue: $15.0 billion, up 1% (2% in constant currency).
• Software revenue growth: 10%.
• Consulting revenue remained flat.
• Infrastructure revenue fell by 7%.
• Profit margins:
• GAAP gross margin: 56.3%, up 190 basis points.
• Non-GAAP operating gross margin: 57.5%, up 210 basis points.
• Pre-tax profit margin:
• GAAP margin: 14.1%, up 110 basis points.
• Non-GAAP margin: 17.7%, up 220 basis points.
• Cash flow: IBM generated $9.1 billion in cash from operations year-to-date in 2024, with free cash flow totaling $6.6 billion.

IBM’s software revenue performed strongly due to the accelerated growth of its Red Hat division. Q3 software revenue reached $6.52 billion, a 10% year-over-year increase, marking the largest revenue gain in three years, with a gross margin of 83%. The Red Hat segment saw revenue grow by 14%. IBM CFO Jim Kavanaugh said during an analyst call that this was the highest quarter for bookings since IBM acquired Red Hat.

By segment:

• Software revenue reached $6.52 billion, up about 10%, exceeding analysts' consensus forecast of $6.37 billion. The software segment’s gross margin was 83%, higher than any other segment.
• Consulting revenue totaled $5.15 billion, down 0.5%, slightly missing analysts' expectations of $5.19 billion. IBM CEO Arvind Krishna noted that this result was at the low end of IBM’s expectations.
• Infrastructure revenue slowed, with Q3 revenue at $3.04 billion, a 7% year-over-year decline, falling short of the $3.24 billion expected by analysts. Kavanaugh mentioned that customers are awaiting IBM's new mainframe products set to launch in the first half of 2025.

Notably, IBM reported it now has over $3 billion in generative AI-related business, with more than $1 billion added in the second quarter. Approximately 80% of this came from consulting, with the remainder from software.

So far this year, IBM stock has risen by about 43%, while the S&P 500 index has increased by approximately 21% over the same period, excluding after-hours trading impacts.

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