Published on October 26, 2023, 8:36 am

TLDR: IBM's third-quarter earnings were boosted by the growing interest in generative AI among enterprises. The increased demand for generative AI has led to an increase in software and consulting revenue for IBM. With a focus on generative AI, IBM is confident in its prospects and expects technology spend to outpace GDP. Clients are adopting IBM's Watson AI and hybrid cloud solutions, driving growth in software and consulting businesses. IBM has made strategic investments in generative AI and plans to release new offerings to address enterprise use cases. The company also provides indemnity coverage for its large language models to address legal and data security concerns. Revenue from security software experienced a decline, but overall growth in data and AI business remains strong. IBM's commitment to providing strong governance tools and its team of consultants ensure it remains at the forefront of innovation in this space.

IBM’s third-quarter earnings received a boost from the growing interest in generative AI among enterprises. This increased demand for generative AI has led to an increase in software and consulting revenue for IBM.

IBM is placing a big bet on generative AI as a way to overcome macroeconomic challenges and finish the fiscal year on a high note. During an earnings call, IBM CEO Arvind Krishna expressed confidence in the company’s prospects, stating that the tailwinds of technology spending outweigh the headwinds and that technology spend will continue to outpace GDP. Krishna also highlighted the good revenue growth in software and consulting during the past quarter.

Clients are increasingly adopting IBM’s Watson AI and data platform, along with its hybrid cloud solutions, to unlock productivity and operational efficiency. This adoption is driving solid growth in IBM’s software and consulting businesses. As a result, the company remains confident in its revenue and free cash flow growth expectations for the full year.

In terms of financial performance, IBM reported total revenue of $14.8 billion for the quarter ended September, representing a 4.6% year-on-year growth. Revenue from data and AI saw a 6% year-on-year increase.

During the earnings call, Krishna revealed that IBM had made several strategic investments in generative AI based on customer demand. The CEO highlighted three key enterprise use cases for AI: code modernization, customer service, and digital labor. These use cases have broad relevance and deliver tangible business benefits according to extensive feedback and trials conducted by IBM.

To cater to these use cases, IBM released products such as Granite—a multibillion-parameter foundation model on watsonx.ai—known for excelling in both language and code. Additionally, WatsonX Code Assistant was introduced, which includes the Assistant for Z systems. Before the end of the year, IBM is also planning to launch watsonx.governance—an offering designed to provide governance tools that businesses can use to mitigate risks and ensure compliance throughout the AI life cycle.

Krishna acknowledged that generative AI governance is a key concern for enterprises, as they are worried about the legal and data security implications of utilizing this technology. However, IBM seeks to address these concerns by providing indemnity coverage for all its large language models. This means that IBM stands by the data used to train these models. Other tech giants like Microsoft and Adobe have also started offering similar indemnity coverage for their large language models.

IBM boasts a strong team in the field of data and AI, with over 20,000 consultants dedicated to helping enterprises navigate the AI landscape—from strategy development to responsible deployment. These consultants provide valuable real-time feedback to other product teams and are expected to further fuel growth in IBM’s consulting business.

From a software services perspective, hybrid cloud, automation, and AI were major contributors to revenue growth in the reported quarter. IBM’s clients are embracing the hybrid cloud approach, with annual bookings up 14% in the quarter. This includes double-digit growth across RHEL, OpenShift, and Ansible. The growth in AIops and management was driven by good performance in Instana, Turbonomic, and Apptio as enterprises seek to optimize business outcomes and productivity.

Although there was overall growth in IBM’s data and AI business, revenue from security software experienced a 3% year-on-year decline due to a slowdown in managed security services.

In summary, IBM’s focus on generative AI is paying off as it experiences increased demand for its software and consulting services. With its robust portfolio of generative AI products and commitment to providing strong governance tools, IBM is well-positioned to address enterprise needs while navigating legal and data security concerns. The company’s dedication to helping customers leverage AI effectively through its team of consultants ensures that it remains at the forefront of innovation in this space.

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