A focus on the future helps IBM deliver growth across all segments

IBM’s Q4 results reveal a firm making progress across all segments, built on a commitment to innovation and meeting current and future customer needs.

Growth has proved challenging to eke out in recent quarters across the industry. Q3 2023 numbers for the TWILTCH group (TCS, Wipro, Infosys, LTIMindtree, Tech Mahindra, Cognizant, and HCLTech) show a decline in some cases and low-single-digit growth for most. These Indian heritage firms usually act as a bellwether for the broader market. In this case, perhaps IBM is showing the way ahead.

IBM registered 4% YoY growth (3% at constant currency) in Q4 2023 revenues, reaching $17.4 billion from $16.7 billion in Q4 2022. It is a significant increase over the quarterly revenues of the last two years. The software, consulting, and infrastructure segments all contributed to the uptick. Maintaining consistent growth across all segments is not easy in a fluctuating market. That IBM has managed to pull this off pays tribute to a nuanced understanding of customer needs and market trends.

Consulting is the rising star of the IBM show

Growth in consulting leads the way at 5.5% at constant currency, contributing $5 billion in Q4. Within consulting, applications operations are up 6%, business consulting is up 5%, and technology consulting is the laggard at 4%.

Despite technology consulting bringing up the rear, IBM’s alignment with future-centric technologies like generative artificial intelligence (GenAI) contributes to success. The firm’s watsonx platform notably doubled its GenAI business from Q3 to Q4 2023. The firm’s GenAI business comprises software, transactional revenue, SaaS contracts, and consulting deals.

IBM says consulting is a core driver of its value proposition. Coupled with its technology stack and AI platform-based approach, consulting helps it win AI clients. Consulting also supports clients in preparing their data architecture, security, and governance for GenAI solutions. IBM is ready to shoulder risk with the client by including indemnification of all its models.

Red Hat leads growth in software revenue

Red Hat’s performance stands out in the software part of the business, where revenues are up 2% at constant currency in Q4. IBM ramped up its Red Hat division to meet the demand for hybrid cloud. Revenue from the open-source software developer is up 7%, while automation is flat. Data and AI are up 1%, transaction processing is up 5%, and security is down 6%.

Infrastructure revenue hit $4.6 billion for the quarter (up 2% on the previous quarter). There were big winners—and big losers. Hybrid infrastructure, IBM zSystems, and distributed infrastructure were all up by 7% to 8%, but infrastructure support is down by 9%.

IBM has the cash on hand to keep on investing

In a rapidly changing technological landscape, IBM must continue to respond with additional capabilities. With a free cash flow of $11.2 billion, it has the cash to do just that. The firm made nine acquisitions worth $5 billion in 2023 to support its hybrid cloud and AI ambitions. It has also announced an Enterprise AI Venture Fund of $500 million to partner with the startup community, tap into the market’s latest AI innovations, and help startups scale. IBM is also a core part of the AI Alliance, a group of 70 industry and academic leaders joining to advance open, safe, and responsible AI.

IBM’s operational initiatives have paid off with run rate savings of $1.5 billion

To make the cash available for continued innovation, IBM has pursued operational initiatives to enhance productivity. IBM set a target for run-rate savings of $2 billion by the end of 2024. It has achieved 75% of that by Q4 2023 by digitally transforming its business processes and scaling AI within the organization. It has simplified its approach to application and infrastructure, streamlined supply chains, realigned teams by workflows, cut office space, and focused on a higher value-added workforce supported by automation and AI-driven efficiencies.

IBM Global Business Services (GBS) rebranded to IBM Consulting in a move IBM expects will boost the employer brand to attract talent.

Q4 builds on a year of steady momentum for IBM, recording full-year revenue growth of 3% and a pre-tax income margin of 14%.

The Bottom Line: Navigating this rapidly changing tech landscape requires a clear view of the future, intent to innovate, and operational agility.

Enterprise leaders navigating this rapidly evolving landscape could take a leaf out of IBM’s book. IBM’s renewed blend of innovation, operational agility, and strategic foresight shows it is possible to navigate the complexities of emerging technologies and market dynamics while turning a profit and increasing growth rate.