https://www.wsj.com/articles/ibm-second-quarter-earnings-advance-on-9-sales-growth-11658174983
By: Sarah Donaldson
Updated July 18, 2022 6:46 pm ET
International Business Machines Corp. IBM -1.28%▼ reported 9% sales growth in second-quarter results that also reflected some of the wider concerns tech investors confront as the sector kicks off its earnings season.
IBM on Monday said revenue for the April through June period reached $15.5 billion after Chief Executive Arvind Krishna vowed to reinject growth into the business. As part of that plan, IBM spun off some of its declining operations last year.
But the company also exited profitable operations in Russia after Western governments imposed sanctions on Moscow for its invasion of Ukraine, IBM Chief Financial Officer Jim Kavanaugh said Monday. The strength of the dollar also affected its results, he added.
Still, IBM said earnings per share in the second quarter rose almost 80% from the year-ago period to $1.61 a share. Sales and earnings per share surpassed Wall Street’s expectations, according to analysts surveyed by FactSet.
The company is also dealing with inflationary labor pressures. The company’s consulting business, which represents more than half of IBM’s workforce, is seeing higher costs, Mr. Kavanaugh said. IBM is adjusting pricing to clients, he said, though there is a lag until those costs can be recovered. The company said it also is seeing other costs increasing.
IBM shares fell more than 4% in after-hours trading.
The pandemic was a boon for many tech companies, with people working from home embracing digital products and services. Recent weeks, however, have brought signs market dynamics are changing and tech companies are looking to adapt.
Chip companies are seeing signs that demand in some areas—such as personal computers—is ebbing. Snap Inc. SNAP 1.98%▲ has said disruptions in the digital ad market would weigh on its results due Thursday and Microsoft Corp. MSFT -0.96%▼ has warned that the strong dollar would weigh on its earnings. Alphabet Inc.’s GOOG -2.53%▼ Google said this month it would slow hiring for the rest of the year, after Facebook META 1.54%▲ parent Meta Platforms Inc. in March said it would throttle back.
Mr. Kavanaugh said he sees automated and digitized tech as a “deflationary force” with generally strong demand heading into the second half of the year. “Technology is becoming a source of sustainable competitive advantage for every industry and every client, and especially in highly inflationary markets, which is what we’re operating in today,” he said.
Mr. Krishna said the company’s business prospects are largely unchanged amid growing concerns about an economic downturn. “Our pipelines are remaining pretty healthy,” he said on the earnings call.
The strengthening of the dollar against many foreign currencies caused IBM to update its full-year outlook from the prior quarter. The company, which stuck to its sales growth forecast on a constant currency basis, said free cash flow should reach about $10 billion this year. IBM had previously said free cash flow would be between $10 billion and $10.5 billion.
In recent years, IBM has bet on the areas of hybrid cloud computing and artificial intelligence to restore growth. IBM bought open-source software company Red Hat in 2018 to underpin focus on hybrid cloud operations, where companies mix using their own, private servers and remote data centers operated by others. Hybrid cloud revenue grew by 18% to $5.9 billion in the quarter and generated $21.7 billion in sales over the past 12 months.
Software revenue in the most recent quarter rose 6%, which included revenue from its commercial relationship with Kyndryl Holdings Inc., KD 2.88%▲ the operations IBM spun off last year.
IBM also reported growth in its infrastructure segment during the second quarter, driven by sales of a new generation of mainframes the company provides.