‘While it is still very early in the second quarter, we have not seen a material change in client buying behavior,’ IBM CEO Arvind Krishna said on the call.
Despite the cuts to IBM’s federal business by the Elon Musk-led U.S. Department of Government Efficiency (DOGE) and economic uncertainty from global tariffs, IBM added another $1 billion-plus quarter over quarter to its generative artificial intelligence book of business and maintained its full-year guidance on revenue growth and free cash flow.
However, Arvind Krishna–CEO of the Armonk, N.Y.-based maker of mainframe, GenAI and cloud products–warned that a slowing economy could hit multiple divisions within IBM, including its consulting arm and its Red Hat subsidiary.
Executives revealed IBM’s latest performance Wednesday during its quarterly earnings call, covering the three months ended March 31. In an unusual move, the vendor also forecasted its second fiscal quarter revenue, telling analysts to expect between $16.4 billion and $16.75 billion.
“While it is still very early in the second quarter, we have not seen a material change in client buying behavior,” Krishna said on the call.
[RELATED: IBM Sets June Date for AI Agent Era z17 Mainframes]
IBM Q1 2025
IBM’s GenAI book of business now totals $6 billion inception to date. It forecasts full-year revenue growth of at least 5 percent year over year and full-year free cash flow of about $13.5 billion.
In 2025, IBM is working to add more qualified partners, increase the overall percentage of company revenue that comes through the channel and improve partner technical skills, according to CRN’s 2025 Channel Chiefs.
When asked about why IBM forecasted its second quarter results, CFO Jim Kavanaugh said he “felt obligated” given the uncertain economy–including the U.S. dollar weakening about 9 percent over the last three weeks.
“The magnitude and the breadth of the U.S. dollar depreciation we have not seen in quite some time,” he said.
Slowdown Potential
Krishna said that IBM did not see a slowdown during the quarter in its software consumption business in transaction processing and Red Hat.
But in the event of negative global gross domestic product (GDP) and a recession, IBM could see “a small slowdown” in the Red Hat part of the software consumption business and a slowdown in the transaction processing business, Krishna said.
IBM is not projecting a recession “from everything that we can see and read,” Krishna said.
Red Hat represents between 10 percent and 20 percent of IBM’s total business.
Kavanaugh said IBM is “seeing clients delay decision-making, especially in discretionary projects, which impacted our in-period signings” in consulting.
But the vendor “had good growth in transformational offerings like hybrid cloud and data as well as application management and cloud platform engineering services,” he said.
DOGE Effects
IBM “had a couple of contracts that were impacted in the first quarter” due to the cost-cutting activities of DOGE, Krishna said.
Kavanaugh put the total of money lost to DOGE cuts at less than $100 million in backlog over multiple years. Multiple media reports have said that IBM lost government business due to Trump administration cuts at the U.S. Agency for International Development (USAID).
Most of IBM’s federal government work is in mission-critical work that can’t be cut, Krishna said.
“We actually process veterans benefit claims,” he said. “We help process how the GSA (General Services Administration) does procurement. We help implement payroll systems. I don’t think of these as optional. Now, are there some areas around the edges which could be viewed as discretionary? Yes. But in our case, that is the minority of our business, not the majority.”
Krishna warned “it’s hard to predict where that goes over the rest of the year” and that “if there is pressure in the economy, consulting tends to see headwinds before other parts of the business.”
Kavanaugh said that IBM is still bullish on consulting continuing to grow 5 percent to 6 percent over the decade. Plus, consulting has a multiplier effect to the business, acting as “the tip of the spear” in bringing customers to more offerings within the IBM product portfolio.
IBM’s federal business accounts for less than 5 percent of its total revenue and less than 10 percent of its consulting business, the CFO said. IBM Consulting–No. 6 on CRN’s 2024 Solution Provider 500–has less than 3 percent market share in federal consulting.
Sixty percent of the federal business is consulting–more easily cut–and the rest is high-value, annuitized technology revenue under contract.
IBM Consulting was about flat year over year at $5.1 billion. That still represented growth quarter over quarter after consulting fell 1.1 percent the prior quarter. Strategy and technology consulting fell 1 percent. “Intelligent operations” was about flat.
“We’ve been actively engaged with the administration, as you can quite imagine,” Kavanaugh said.
Krishna opened up the call with a compliment to President Donald Trump. “We appreciate the administration’s focus on economic growth and rational regulation, which will strengthen the U.S. competitive position,” he said. “We believe this will result in long-term value creation and make it easier for technology to contribute to economic growth.”
AI Matures
When asked about the state of AI, Krishna said he has seen the market mature in a similar way to past transformational technology such as PCs and mobile phones.
Clients have moved on from a focus on the semiconductors and systems to the application layer, looking to improve customer experiences and improve enterprise operations.
“It is shifting to those conversations,” he said. “I believe that that is where the next two to three years of success in AI is going to go.”
IBM has leveraged its own technology to become more efficient, Kavanaugh said. For example, it used hybrid cloud, automation and AI tools to decrease spending by more than $1 billion in supply chain and service delivery.
Red Hat Takes On Virtualization
IBM’s leadership called attention to Red Hat taking share in the virtualization space as customers of legacy VMware technology look to alternatives after the vendor changed pricing–similar to a change at virtual desktop vendor Citrix.
The disruption has led to the likes of Nutanix, Microsoft and Parallels also seeing customer interest in their technology.
“Virtualization, already, just the last couple quarters, we’ve already notched in over $200 million of annualized bookings,” Kavanaugh said. “We’ve been building a pipeline that is well north of half a billion dollars worth of virtualization.”
Red Hat grew about 13.5 percent year over year in the quarter and saw its seventh consecutive quarter of high teens annual contract value (ACV) bookings, Kavanaugh said. The virtualization, automation and Linux businesses grew double digits during the quarter.
Although Red Hat’s growth fell quarter over quarter from 17 percent ignoring foreign exchange, Kavanaugh said “we’re very pleased with our Red Hat performance entering the year.”
The 20 percent of Red Hat’s business that is consumption based didn’t decline, but it did moderate to high single digits, Kavanaugh said. “Very different profile from where we were a year ago, by the way, when we were trying to accelerate to get the double digits for the year,” he said.
Red Hat Enterprise Linux (RHEL) grew 13 percent year over year. OpenShift grew 23 percent and has $1.5 billion in annual recurring revenue (ARR). Ansible grew in the mid teens, the CFO said.
Krishna called Red Hat OpenShift the “the leading platform” for containerization and running servers on-premises and in private clouds.
These Red Hat customers are also now looking to the vendor’s virtualization capabilities on their environments. IBM sees a flywheel that should also benefit Ansible and newly acquired HashiCorp, Krishna said.
The virtualization play isn’t just about taking out competitors, he said. “It is going to be much more about a platform, and people are making a decision, which platform can I depend upon for the next 10 to 20 years?”
Mainframes, Infrastructure
With global tariff spats potentially causing supply chain disruptions, Kavanaugh said that IBM “proactively took actions to bolster our supply chain ahead of our z17 launch, resulting in higher inventory levels.”
“Over the last several years, we have strategically diversified and streamlined our supply chain,” Kavanaugh said. “Goods imported to the U.S. represent less than 5 percent of our overall spend. And under current U.S. tariff policy, the impact to IBM is minimal.”
IBM is also “tactically evaluating alternative sources and other strategies to mitigate tariffs” where it affects the vendor overseas, he said.
For clients that don’t want to spend capital on new mainframes, IBM has offered leasing for a long time worldwide, Krishna said.
“It is surprising how many people, even with great balance sheets of their own, often choose to do that” Krishna said. “It doesn’t really impact our balance sheet, because in that case, we have a receivable against the debt that we take on to do that. So we would happily do that for any credit-worthy client.”
Krishna is optimistic on strong mainframe purchasing through 2025 and into the first half of 2026. Economic uncertainty also helps the business “because those who are thinking about capacity expansion at the end of the year are wondering whether it’s more advantageous to them to do it earlier because there is a financial benefit if you have it, as opposed to pay for overages, which is certainly possible,” he said.
Kavanaugh added: “We run 45 of the top 50 banks around the world. Nine of the top 10 retailers. Four to five top 10 airlines of the world. We are going to protect those clients and what the mainframe brings to the table.”
IBM Q1 In Depth
IBM saw revenue of $14.5 billion during the quarter, up 2 percent year over year ignoring foreign exchange.
IBM’s software division saw revenue grow 9 percent year over year ignoring foreign exchange, contributing $6.3 billion. Software’s annual recurring revenue (ARR) grew to $21.7 billion, up 11 percent year over year.
Automation grew 15 percent. Data grew 7 percent. And transaction processing grew 2 percent.
Infrastructure fell 4 percent year over year, delivering $2.9 billion in revenue. Hybrid infrastructure fell 7 percent. IBM Z–in the early days of a refresh cycle–fell 14 percent. Infrastructure support revenue was about flat year over year ignoring foreign exchange.
Kavanaugh said the IBM Power portfolio saw “product cycle dynamics” as a headwind. But the storage business “delivered another quarter of double-digit growth.”
The vendor saw $4.4 billion in net cash from operating activities and $2 billion of free cash flow. IBM ended the first quarter with $17.6 billion in cash, restricted cash and marketable securities–giving the vendor room to work with for future potential acquisitions.
IBM’s stock traded at about $230 a share after hours Wednesday, down about 7 percent.
