IBM Q3 2024 Earnings Preview: 5 Things To Know

In separate reports,Bernstein and Bank of America predicted about $15 billion in revenue for IBM’s third quarter, in line with Wall Street’s expectations.

Updates on the artificial intelligence portfolio, a strong z16 mainframe cycle and performance in IBM Consulting are some of the subjects expected to come up on the tech giant’s latest quarterly earnings call.

The Armonk, N.Y.-based vendor reports earnings for the quarter ended Sept. 30 on Wednesday, with plenty of interest expected around customer demand for AI and details on IBM’s plans for the upcoming acquisition of HashiCorp and recently acquired assets from Software AG.

In separate October reports, investment firms Bernstein and Bank of America predicted about $15 billion in revenue for IBM’s third fiscal quarter, in line with Wall Street’s expectations.

IBM Third-Quarter 2024 Earnings Preview

Bernstein expects IBM to reaffirm its expected revenue for the 2024 fiscal year and its free cash flow targets. The vendor has said to expect full-year revenue growth at the low end of mid-single digits, putting growth around 4 percent year over year, according to Bernstein.

Bernstein doesn’t expect IBM to forecast its 2025 fiscal year until the next earnings call. However, barring a disappointing z17 mainframe cycle, the expected reacceleration of the Red Hat and hybrid platform businesses, the AI book of business and contributions from HashiCorp, WebMethods and StreamSets all set IBM up for 6 percent revenue growth in 2025, according to the investment firm.

Bank of America predicts IBM to guide to about $17.79 billion in revenue for the fourth fiscal quarter, below the Wall Street consensus of $17.83 billion. It also predicts fiscal year 2025 revenue of $66.2 billion.

Here’s more of what to look for in IBM’s next quarterly earnings call.

IBM AI Updates

On the earnings call, IBM Chairman and CEO Arvind Krishna will probably have plenty of news to share on the vendor’s AI offerings.

Bank of America said in an October report that GenAI–a $2 billion book of business from inception to date for IBM–”is a meaningful opportunity for both consulting (~75%) and software (~25%).”

IBM M&A, Sales, Integrations

Analysts on Wednesday’s call will likely want a progress report on the upcoming acquisition of HashiCorp plus the integration of Software AG’s StreamSets and WebMethods–bought in the third quarter–plus what’s next after the September sale of QRadar assets to Palo Alto Networks.

An October report by Bernstein estimated that StreamSets and WebMethods brought in about $150 million in the latest quarter.

The firm’s report said that HashiCorp could weigh on IBM earnings growth. Once acquired, HashiCorp should contribute about $600 million to fiscal year 2025. StreamSets and WebMethods should bring in about $300 million in total.

However, HashiCorp should only bring in about $76 million in net income and $79 million in free cash flow for the 2026 fiscal year. IBM is buying HashiCorp at a $6.4 billion enterprise value.

“While we believe there is real potential for cost synergies at Hashicorp (likely ~$125M annually), we believe synergies will likely not all be immediately realized, and accordingly believe the deal will be EPS and FCF dilutive in the first year,” according to Bernstein.

Bank of America’s October report predicted 1.5 percent year-over-year growth from acquisitions in fiscal year 2024.

As for QRadar, Bernstein said that IBM implied “that there would be further structural actions to address stranded costs resulting from” the sale.

“We *guesstimate* that IBM might capture a ~$300M net gain on sale from Qradar, and take perhaps $200M in restructuring charges,” according to the firm.

Red Hat, IBM Software

The October Bernstein report predicted Red Hat growth rate of about 10 percent for the latest quarter. Bank of America put the growth rate at 9 percent for the latest quarter, reaching about 10 percent next quarter. Red Hat grew about 8 percent year over year in the second quarter.

Bernstein estimates that Red Hat will bring in $6.4 billion for the fiscal year, bringing in about $1.6 billion in the third fiscal quarter and about $1.7 billion in the fourth.

The IBM subsidiary’s growth slowed last year, according to Bernstein. But new business after the acquisition of VMware by Broadcom could be a factor in Red Hat accelerating growth, with Broadcom guiding to price increases of at least 50 percent “and anecdotal examples abound of individual customers facing price increases up to 1,000%, leading to increased churn.”

VMware was expected to bring in $13.8 billion in revenue in 2024 before the acquisition by Broadcom, according to Bernstein.

“While we struggle to see revenue getting back to the low-mid teens underlying growth seen in 2022 and before, we do believe that 10-11% growth is likely achievable in 2024-25,” according to Bernstein.

Bank of America predicts a strong Red Hat showing due to strong bookings, share gains against VMware and easier comparisons to a year ago, according to its report.

Bank of America predicts 6 percent growth year over year for IBM software overall.

The Morgan Stanley report in October saw IBM’s cloud share positioning get mixed results. IBM saw its “next 12 month positioning improving to 11th overall in 3Q24 (from 12th last quarter …), while next 3 year positioning fell to 14th in 3Q24.”

IBM Mainframe, Infrastructure

A September report by Bernstein said that a new mainframe cycle with the z17 could mean another 150 to 200 basis points to overall company revenue growth. But the firm said that the z16 has seen “a very unusual cycle” with revenue continuing “to grow in the second year of the cycle, which has not happened in the last 30 years.”

Mainframe accounts for 20 percent of IBM’s total revenue and at least 40 percent of its profit, according to Bernstein. This despite “greater substitution by commodity servers and cloud offerings” and “surveyed CIOs becoming increasingly vocal about their desire to stop increasing mainframe MIPS (millions of instructions per second) capacity” and even “potentially migrate off the platform entirely.”

“The mainframe cycle has been flat to down for 30 years, but historically has been stronger in the first four quarters and declining thereafter,” according to Bernstein. “The z16 cycle has seen more late-cycle strength than past cycles, which is unusual. The closest historical mainframe cycle is the z9, which also saw strength late in the cycle—and which was followed by a relatively weak z10 cycle.”

A strong z17 cycle would mark the fourth consecutive growth, cycle on cycle, “lending credibility to the argument that the mainframe has stopped eroding and is returning to growth,” according to Bernstein. “We encourage investors to closely monitor 2H24 mainframe results ahead of the z17 cycle while a softer 2H could be deflating near-term, it could set up FY 25 for a stronger cycle.”

An October Bernstein report noted debate around “whether late-cycle strength is due to a pull forward of demand, or if the mainframe really is structurally improving, and this quarter’s mainframe results will be a key signpost in that debate.”

Bernstein predicts a 7 percent decrease to mainframe revenue growth in the third quarter, a 15 percent decrease the following quarter and fiscal year 2025 mainframe revenue growth of 18 percent year over year.

A more favorable pricing environment, especially “following the acquisitions of key players (CA by Broadcom and BMC by KKR in 2018; Compuware by Thoma Bravo in 2020),” supports stronger growth in IBM’s transaction processing (TPP) business, but “it remains unclear whether 5-6% growth is sustainable,” according to Bernstein.

“While IBM previously guided for transaction processing to decline mid-single digits through cycles, it typically sees strength early in the mainframe cycle before declining,” However, the z16 cycle has deviated from this script, with mainframe hardware revenues growing mid-to-high single digits against tough launch period comps … while transaction processing has sustained strength (including stunning 11% growth last quarter) — we expect it to grow 6.6% in 2024” as an estimate.

Morgan Stanley reported results of a third-quarter survey of CIOs that showed overall hardware spending expectations as “flat to slightly lower into 2025, though underlying end-market data is more bullish, and GenAI is increasingly an incremental tailwind to budget plans.”

Average three-year hardware vendor net spending intentions in the third quarter improved by 11 points over the first quarter, reaching 12 percent growth, according to Morgan Stanley. Dell had the best showing among a group of hardware vendors, which included IBM. HP came in second. IBM, along with Logitech, saw more mixed results.

“IBM net spending intentions improved vs. 1Q24 but are still 4 points lower than the average infrastructure vendor, with IBM's expected budget share gains/losses due to the shift of workloads to the cloud also mixed over the next 1-3 years,” with next 12 months (NTM) positioning improved and the next-three-years positioning deteriorated, according to Morgan Stanley.

The Morgan Stanley survey showed that about “50% of CIOs use an IBM mainframe … of which the majority (17% of the overall 47%) expect to decrease mainframe spending Y/Y due to shrinking capacity, while 13% expect to keep mainframe spending unchanged Y/Y, and 17% expect to increase mainframe spending.”

Morgan Stanley called the responses “more subdued than we would have expected given the z17 launch next year.”

For IBM enterprise license agreement (ELA), “33% of CIOs acknowledged having an ELA with IBM, though only 4% expect to renew their ELA in the next 12 months, with 24% expected to renew in 1-2 years.”

“In total, 55% of CIOs with IBM ELA's expect to renew their ELA at the same rate, 25% expect to renew at higher rates, and 10% expect to renew at lower rates,” according to Morgan Stanley.

In storage, IBM fell in the middle of the vendor pack, receiving 13 percent of the vote for storage provider best positioned to capture new areas of growth, such as cloud and flash. It bested Pure Storage and NetApp but fell behind Nutanix, HPE and No. 1 Dell. (An October Bernstein report called IBM’s storage and Power businesses “growth challenged.”)

For overall IT budgets, IBM–with Dell, VMware, Oracle and Hewlett Packard Enterprise (HPE)–had “the highest risk of losing incremental share of IT budgets both in 2024, and over the next three years,” according to Morgan Stanley. “Microsoft and Amazon remain best positioned to gain incremental share of IT budgets, with Salesforce screening as a share gainer in 2024, while Google screens as a likely distant third place winner in the coming years.”

GenAI-related spending on infrastructure continues to be “an incremental tailwind to traditional hardware budgets for 60-80% of CIOs over the next 1-3 years, up from 45-75% in 1Q24,” according to the survey.

IBM Consulting

The performance of IBM Consulting–No. 6 on CRN’s 2024 Solution Provider 500–is another likely subject for Wednesday’s call.

Bernstein pointed to the consulting business as an early measure of AI growth. “Although IBM conceded that consulting bookings to date ($1.5B) are largely ‘shifted’ vs. incremental, and IBM’s definition of an AI booking is likely relatively inclusive, we do believe that gaining early traction in consulting in a new practice area is important, which IBM appears to be doing,” according to the firm.

“In addition to the long term implications, we also note that ~$2B in bookings could potentially lead to material revenues in FY 2024 (albeit with some potential cannibalization of other consulting practices),” according to the firm.

Bernstein said that it expects “consulting margins should improve throughout the year (we model up from 8.9% to 11.3%),” according to Bernstein.

In an October report, Bank of America said it expects “softness” in the consulting wing compared to “strength” in IBM software. The investment firm predicts “weaker Consulting given pullback in discretionary projects and overall soft macro,” with revenue experiencing flat growth year over year for the third fiscal quarter, fourth and 2024 fiscal year.

“We believe IBM continued to see some pressure from smaller, more discretionary projects in F3Q,” according to Bank of America. However, consulting revenue in the second half of the fiscal year should “benefit from backlog conversion, M&A, and Gen AI backlog.”

In the second quarter, IBM closed on its purchases of application modernization capabilities from Advanced, meant to enhance its consulting wing’s mainframe app and data modernization services.