IBM’s AI Surge Fails to Offset Investor Jitters Over Cloud Slowdown

Mixed Results Despite Strong Financial Performance

IBM delivered solid third-quarter financial results with significant artificial intelligence momentum, but according to reports, investor concerns about slowing cloud growth overshadowed the positive earnings. The technology giant reportedly generated $16.3 billion in revenue, representing a 9% year-over-year increase and surpassing analyst estimates of $16.09 billion based on LSEG data.

Mixed Results Despite Strong Financial Performance
AI Business Expansion Contrasts With Cloud Slowdown
Infrastructure Boom Driven by AI-Powered Mainframes
Software and Consulting Deliver Mixed Performance
Improved Profitability and Revised Outlook

Sources indicate that net income climbed to $1.74 billion, or $1.87 per share, compared to a loss of $330 million during the same period last year. Despite these upbeat results, IBM shares fell nearly 7% in pre-market trading on Thursday, reflecting market unease about decelerating cloud growth, particularly in the Red Hat hybrid cloud unit.

AI Business Expansion Contrasts With Cloud Slowdown

The highlight of the quarter appears to be IBM’s rapidly growing AI portfolio, which reportedly reached $9.5 billion, a $2 billion increase from the previous quarter. According to the company’s press release, IBM chairman and CEO Arvind Krishna stated that “clients globally continue to leverage our technology and domain expertise to drive productivity in their operations and deliver real business value with AI.”

However, analysts suggest that the slowing cloud segment has captured significant attention. Revenue in Red Hat, IBM’s hybrid cloud division, grew 14%, down from 16% growth in the prior quarter. This slowdown reportedly dampened enthusiasm for what has been one of IBM’s highest-margin businesses.

Infrastructure Boom Driven by AI-Powered Mainframes

Despite the cloud segment’s slight dip, IBM’s hardware business demonstrated remarkable strength, particularly its mainframe systems. The report states that infrastructure revenue climbed 17% to $3.6 billion, led by a 61% increase in IBM Z mainframe sales. The new z17 mainframe, designed specifically for AI workloads, reportedly saw strong demand across the financial sector.

According to IBM CFO James Kavanaugh, the System z17 platform “delivered its highest third-quarter revenue in nearly two decades,” driven by financial institutions using the technology to maintain strict data and encryption standards.

Software and Consulting Deliver Mixed Performance

IBM’s software unit, which includes Red Hat and automation tools, reportedly generated $7.2 billion in revenue, up 10% year-over-year. Automation software led the charge with 24% growth, while data-related products rose 8%, according to the company’s press release.

Consulting revenue also inched higher, up 3% to $5.3 billion, as more enterprises sought IBM’s assistance in deploying and managing AI at scale. Still, sources indicate that the slight slowdown in software sales left some investors uneasy about IBM’s ability to sustain momentum in its high-margin digital services.

Improved Profitability and Revised Outlook

IBM reportedly achieved a gross profit margin of 57.3% (GAAP) and 58.7% (non-GAAP), both showing improvement over last year. The company generated $2.4 billion in free cash flow during the quarter and returned $1.6 billion to shareholders through dividends.

CFO Kavanaugh highlighted that the results were underpinned by disciplined execution and broad portfolio strength. “New innovation, the strength and diversity of our portfolio, and our disciplined execution led to acceleration in revenue growth and profit in the quarter,” Kavanaugh noted in the company’s release.

Buoyed by strong earnings, IBM has raised its full-year forecast, now expecting revenue growth of more than 5% at constant currency and free cash flow of about $14 billion for 2025, according to the financial report.

References

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