International Business Machines Corp Q2 2025 Earnings Call Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: Wamsi Mohan - Bofa Merrill Lynch Asset Holdings Inc - Analyst : I was hoping you could double click on the software trends. It looks like organic growth decelerated in the quarter to maybe between 3% to 4%. Could you confirm that? That would imply that it would be the third quarter of Software organic growth deceleration. But you just expressed confidence in your approaching 10% guide. So between Transaction Processing deceleration, maybe Red Hat maintaining it, what are some of the other puts-and-takes that we should be expecting in the business? And how much should we expect organic Software growth to be for the remainder of the year? James Kavanaugh - International Business Machines Corp - Chief Financial Officer, Senior Vice President - Finance and Operations Okay. Wamsi, thank you for the question. Appreciate it. Let's get right to the heart of this. You dial back to how we opened up the year in January and then, we built on that at our Investor Day in early February. We talked about 2025, we were entering from a position of strength in Software. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. JULY 23, 2025 / 9:00PM, IBM.N - Q2 2025 International Business Machines Corp Earnings Call Why? New innovation we're bringing to market; strong recurring revenue base -- by the way, now $23 billion, growing double digits; Red Hat momentum throughout the year and the opportunity around virtualization and others; GenAI book of business; and the M&A growth synergies. Halfway through the year, right now, we actually feel even more confident about the year of approaching double digits. Let me just break this down compared to the Investor Day model around each of our categories: one, hybrid cloud. We accelerated our Red Hat performance first quarter, second quarter by an incremental point, now growing about 14.5%. By the way, that's contributing about 3.5 points of IBM's Software revenue growth, all organic, by the way. We continue to see mid-teens growth for the year and contributing about 3.5 points. Why? Double-digit growth again in annualized bookings, opportunities around virtualization. By the way, through the first three quarters, we now eclipsed $300 million worth of total bookings around virtualization. We see that pipeline even accelerating faster in the second half. And then, you got AI and application, hybrid cloud containerization that's going to drive it. So we feel pretty good about Red Hat. Two, Automation. Our model on Automation is low double digits. We operated through the first half at 15% above model. Now, underneath that, we're contributing about 3.5 points of that Software growth. We're off to a great start in HashiCorp, as we talked about in the prepared remarks. We're very excited about the integrated value of that value proposition across IBM plus Red Hat plus HashiCorp, with 2x the annual bookings in the first quarter underneath IBM. And oh, by the way, our pipeline in the second half is 3x last year across our entire Automation portfolio with regards to HashiCorp. So we actually expect Automation to continue to accelerate throughout the year. We will be well above our model, mid- to high teens. Against that Investor Day model, that's going to contribute about an incremental point of growth. Third, Data. Data, we continue to execute well on GenAI momentum. Now, inception-to-date, $1.5 billion worth of book of business on Software. We're bringing new innovation to market that we showcased at Think. We're building a strong pipeline in the second half that we're confident on. And we have the M&A synergies that are going to play forward, both in Automation and in Data. So we expect that to deliver our model. Now, you come to Transaction Processing. Transaction Processing flat through the first half. That's, by the way, below our model, mid-single digit, right? That's about a 2-point impact to the first half to Software's growth. When you look at it, what are we seeing? As we always talked about, Transaction Processing runs mission-critical software on top of our mainframe platform. We run that mainframe platform as a stack economic play, $3 to $4, a platform multiplier over the cycle. We're off to the strongest-ever first quarter start in the history of IBM around mainframe in a launch quarter. We shipped over 100% MIPS capacity into the marketplace on z17. So while that's having a near-term impact on Transaction Processing, you saw it down 2% in the quarter, clients reprioritized their spend to the hardware. Now, that will impact near term but look at what happened on z16? Same thing happened in second quarter last year. What happened? We accelerated that growth. That's that multiplier effect as we get more capacity in a marketplace. We expect Transaction Processing now to be about low single digit. It will return to growth in the second half. So between accelerating growth continued on Red Hat, the Automation synergistic value on Hashi, Transaction Processing capitalizing on that multiplier effect of a very strong start on mainframe, we see that organic growth moving forward. And oh, by the way, we're comfortable with third-quarter guidance. Third-quarter guidance already accelerates organic growth. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. JULY 23, 2025 / 9:00PM, IBM.N - Q2 2025 International Business Machines Corp Earnings Call

Question: James Schneider, Ph.D. - Goldman Sachs Group Inc - Analyst : I was wondering if you step back and look at the holistic Software portfolio, there were a lot of questions on what we're doing for this year. But maybe, going forward, heading into 2026, given the impact of some of the businesses and positive tailwinds you talked about, do you think there is potential for improving both organic and overall Software growth heading into 2026 from the current 10% levels this year? I wonder if you think that's possible. And then, maybe secondarily, if you could just address the Consulting business and what you're seeing, right now, in terms of the duration of the bookings you're seeing and whether there's any change in the time to commencement of some of the Consulting contracts you're signing.

Question: Erik Woodring - Morgan Stanley & Co Ltd - Analyst : Arvind, I wanted to direct this to you. It builds off of what Jim was just talking about. It's been, I think, only six quarters, you've reached a $7.5 billion cumulative AI book of business. Incredibly impressive in such a short period of time. I'm just wondering if you could provide us with some color on how that's impacting customer spend in the non-AI parts of IBM. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. JULY 23, 2025 / 9:00PM, IBM.N - Q2 2025 International Business Machines Corp Earnings Call And really, what I'm trying to understand is how are customers prioritizing AI over non-AI? Is there cannibalization in other areas of client spend or is it incremental to client spend? How might that change as you look at these engagements out over the next, call it, one to three years? Does it become more incremental? Just would love some flavor on incrementalism versus cannibalization.

Question: Brian Essex - JPMorgan Chase & Co - Analyst : Arvind, for you, I appreciate your public sector-related comments at the beginning of the call. It seems like we're starting to see a more aggressive competitive stance regarding IT investment from the current administration. Based on conversations you may have had, could you frame out how you think IBM is positioned to address the shift in spending priorities of the administration or public sector, in general? And how much visibility do you have there?

Question: Matthew Swanson - RBC Capital Markets Inc - Analyst : Arvind, I wanted to double click, I think, on the $1.5 billion of software Bookings in the GenAI space and specifically, on some of these watsonx products, the data, the governance, and Orchestrate. So one would be, are you starting to see any of these really differentiate themselves in terms of customer demand? And then, specifically on the Orchestrate layer, that seems to be a space that a lot of companies have started to talk about, whether it be model orchestration or agentic orchestration, if you could just talk a little more about your right to win in that space and how you're positioned. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. JULY 23, 2025 / 9:00PM, IBM.N - Q2 2025 International Business Machines Corp Earnings Call