IBM beats third-quarter profit estimates on software strength

(Reuters) -International Business Machines beat analysts' estimates for third-quarter profit on Wednesday, helped by robust growth in its high-margin software segment as businesses prioritized spending on its IT services and doubled down on AI adoption.

Shares of the company fell 6% in extended trading after it missed estimates for third-quarter revenue, dragged down by weakness in its consulting and infrastructure segments.

IBM's software segment recorded its biggest jump in quarterly revenue in three years, driven by sustained demand from enterprises expanding their cloud infrastructure to accommodate generative AI technology.

Software growth has helped drive profits. The Big Blue recorded adjusted earnings of $2.30 per share for the third quarter, beating analysts' average estimate of $2.23 per share, according to data compiled by LSEG.

The company's AI Book of Business — a combination of bookings and actual sales across various products — grew to $3 billion, up $1 billion from the second quarter.

While IBM has been expanding its Watsonx platform, which allows users to enhance code for AI programs or deploy chatbots, the AI book is driven by consulting. The book was one-fifth software and four-fifths consulting in the third quarter.

However, this growth is not yet reflected in the overall consulting segment, as companies have directed spending towards longer-term consulting projects focused on their AI businesses, which are yet to show up in IBM's results.

"You've got this technological shift around GenAI, and many clients are looking at how to free up cost and productivity to go invest in GenAI," Chief Financial Officer James Kavanaugh told Reuters.

Revenue from consulting was relatively flat in the third quarter, down about 0.5% at $5.15 billion, compared to estimates of $5.24 billion.

"There's still temporary challenges around interest rates, around inflation, around geopolitical tension, around demographic shifts," Kavanaugh said in relation to weakness in consulting.

Software revenue grew close to 10% to $6.52 billion in the three months ended Sept. 30, beating estimates of $6.37 billion.

Total sales grew about 1% to $14.97 billion, missing estimates of $15.07 billion.

(Reporting by Arsheeya Bajwa in Bengaluru; Editing by Alan Barona)