IBM Corporation (NYSE: IBM)

IBM delivered solid financial performance in Q1 2025, with revenue growth of 1% (2% at constant currency) to $14.5 billion. The company's gross profit increased 4% to $8.0 billion, resulting in significant gross profit margin expansion of 170 basis points to 55.2%. Pre-tax income grew 8% to $1.2 billion, with pre-tax margin improving 50 basis points to 8.0%. While net income declined 33% year-over-year to $1.1 billion, it's important to note that the prior year period included a substantial benefit from income taxes due to the resolution of certain tax audit matters, making the comparison less meaningful. On an operating (non-GAAP) basis, IBM's performance was strong, with gross profit margin expanding 190 basis points to 56.6% and pre-tax income margin increasing 50 basis points to 12.0%. The company's focus on high-value segments, particularly in Software, combined with productivity initiatives, drove the significant margin expansion and operating leverage in the quarter.

*The year-over-year decline in net income and EPS is primarily due to a significant tax benefit in Q1 2024 from the resolution of certain tax audit matters.

IBM's segment performance in Q1 2025 revealed divergent trends across the business. The Software segment was the primary driver of growth, with revenue increasing 7.4% (9.0% at constant currency) to $6.3 billion. Within Software, Hybrid Cloud (Red Hat) grew 12% (13% at constant currency), Automation increased 14% (15% at constant currency), and Data grew 5% (7% at constant currency). Transaction Processing remained flat (up 2% at constant currency). Software segment profit margin expanded significantly to 29.1%, up 3.7 percentage points year-over-year, highlighting the favorable economics of IBM's software-focused strategy.

The Consulting segment experienced a modest decline of 2.3% (0.5% at constant currency) to $5.1 billion, with both Strategy and Technology and Intelligent Operations showing slight decreases. Despite the revenue decline, Consulting segment profit margin improved substantially to 11.0%, up 2.8 percentage points from the prior year, indicating effective cost management and a shift toward higher-value services.

The Infrastructure segment revenue decreased 6.2% (4.3% at constant currency) to $2.9 billion, primarily due to a 9% decline in Hybrid Infrastructure, including a 15% decrease in IBM Z revenue. This performance is consistent with IBM's product cycle dynamics, as the company is approaching the later stages of the z16 product cycle. Infrastructure segment profit margin contracted to 8.6%, down 1.5 percentage points year-over-year.

The Software segment continues to be IBM's primary growth driver, with strong performance across all product categories. The Hybrid Cloud segment, anchored by Red Hat, delivered impressive growth of 12% (13% at constant currency), reflecting the continued market acceptance of IBM's hybrid cloud strategy. The Automation portfolio grew 14% (15% at constant currency), benefiting from enterprise demand for process automation and AI-powered workflow solutions. The Data segment increased 5% (7% at constant currency), with strong performance in data management and analytics solutions. Transaction Processing, which includes mainframe software, remained flat (up.2% at constant currency), demonstrating resilience in this mature business area.

IBM's strategic focus on generative AI continues to yield positive results, with the book of business exceeding $6 billion inception-to-date, an increase of over $1 billion in the quarter. The company's watsonx AI platform has gained traction with enterprise clients looking to deploy customized AI solutions. IBM's approach to AI emphasizes open, hybrid, and secure enterprise solutions, which resonates with large organizations navigating the complexities of AI adoption. The HashiCorp acquisition further strengthens IBM's software portfolio, particularly in the areas of infrastructure automation and cloud operations, which complements the company's hybrid cloud strategy and enhances cross-selling opportunities.

IBM's cash flow performance remained strong in Q1 2025, with operating cash flow of $4.4 billion, up $0.2 billion year-over-year. Free cash flow reached $2.0 billion, representing a modest increase of $0.1 billion compared to the prior year. The company ended the quarter with $17.6 billion in cash, restricted cash, and marketable securities, an increase of $2.8 billion from year-end 2024. Total debt, including IBM Financing debt of $10.0 billion, was $63.3 billion, up $8.3 billion year-to-date. The increase in debt primarily reflects financing for the acquisition of HashiCorp, which was completed during the quarter for $7.1 billion. IBM returned $1.5 billion to shareholders in dividends, consistent with the company's commitment to shareholder returns. The solid free cash flow performance underscores IBM's continued focus on financial discipline and operational efficiency, providing the company with the flexibility to invest in strategic growth initiatives while maintaining shareholder returns.

IBM has maintained its full-year 2025 guidance, projecting revenue growth of at least 5% at constant currency. At current foreign exchange rates, currency is expected to provide a tailwind of about one to one-and-a-half percentage points to growth for the year. The company continues to expect free cash flow of approximately $13.5 billion for the full year, reflecting confidence in its business model and operational execution.

For the second quarter of 2025, IBM anticipates revenue to be in the range of $16.40 billion to $16.75 billion, indicating expected sequential growth from the first quarter. This guidance suggests continued momentum in the company's core business segments, particularly Software, which is expected to benefit from ongoing demand for AI solutions and hybrid cloud technologies.