IBM bets on generative AI to escape economic headwinds

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Oct 26, 20234 mins

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IBM’s third-quarter earnings were boosted by enterprises’ interest in generative AI, which drove up its software and consulting revenue.

IBM is betting big on generative AI to escape macroeconomic headwinds and finish the fiscal year at a high.

“Overall, we believe the tailwinds outweigh the headwinds, and technology spend will continue to outpace GDP. In this past quarter, we saw good revenue growth in software and consulting,” IBM CEO Arvind Krishna said during an earnings call.

“Clients are increasingly adopting our watsonx AI and data platform along with our hybrid cloud solutions to unlock productivity and operational efficiency. This is helping drive solid growth in our software and consulting businesses. As a result, we remain confident in our revenue and free cash flow growth expectations for the full year,” Krishna added.

IBM’s total revenue for the quarter ended September grew 4.6% year-on-year to $14.8 billion. Revenue from data and AI was up 6% year-on-year.

Big bets on generative AI

In the quarter ended September, IBM placed several large bets on generative AI after seeing demand from its customers, Krishna said during the earnings call.

“The work we are doing, clear patterns are emerging in terms of the AI enterprise use cases. Based on extensive feedback and trials to date, three have risen to the top: code modernization, customer service, and digital labor. All have broad relevance and deliver tangible business benefits,” the CEO said, adding that the company has released products to cater to these use cases in the last three months.

These products include Granite — a multibillion-parameter foundation model on watsonx.ai — which excels in both language and code, and watsonx Code Assistant, which includes the Assistant for Z systems.

The company is also planning to launch watsonx.governance before the end of the year. The product is designed to provide governance tools businesses need to mitigate risks and ensure compliance through the AI life cycle.

Generative AI governance, according to Krishna, is a key issue for enterprises that are worried about the legal and data security ramifications of using the new technology to generate results.

However, Krishna said that the company will provide indemnity coverage to support all its large language models. This means that Big Blue will stand by the data it has used to train these models. Other large technology vendors, including Microsoft and Adobe, have also started providing similar indemnity coverage for their large language models.

IBM said it has over 20,000 data and AI consultants and a center of excellence for generative AI, targeted toward helping enterprises navigate the AI landscape — from crafting a strategy to understanding how AI can be used along with deploying AI responsibly.

“These consultants also provide valuable real-time feedback to other product teams,” Krishna said, adding that interest in generative AI is expected to fuel growth in its consulting business as well.

Hybrid cloud, Red Hat, and Apptio drive growth in software

Hybrid cloud, Automation, and AI were the major contributors to revenue growth from software services for the reported quarter.

“Clients are committing to our hybrid cloud approach, with annual bookings up 14% in the quarter. This includes double-digit growth across RHEL, OpenShift, and Ansible, partially offset by headwinds in consumption-based services,” Jim Kavanaugh, chief financial officer at IBM, said during the call.

The growth in AIops and management, according to Kavanaugh, was led by “good performance” in Instana, Turbonomic, and now Apptio as enterprises look to optimize business outcomes and boost productivity.

The data and AI business was bolstered by growth in areas, such as data fabric and customer service requirements, the company said, adding that enterprises were getting ready to deploy generative AI solutions. However, revenue from security software shrunk by 3% year-on-year as managed security services business slowed down.

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