IBM reports earnings beat, but misses on revenue
IBM Chairman and CEO Arvind Krishna appears on a panel session at the World Economic Forum in Davos, Switzerland, Jan. 17, 2023.

IBM reported second-quarter earnings Wednesday that topped analysts' estimates as the company expanded its gross margin. Revenue missed consensus estimates.

Shares of IBM were little changed in extended trading after the report.

Here's how the company did:

Earnings: $2.18, adjusted, versus $2.01 per share expected, according to Refinitiv.

$2.18, adjusted, versus $2.01 per share expected, according to Refinitiv. Revenue: $15.48 billion, versus $15.58 billion expected, according to Refinitiv.

Net income for the quarter rose 13% to $1.6 billion from $1.4 billion, or $1.72 per share, a year earlier. IBM's adjusted gross margin of 55.9% was higher than the StreetAccount estimate of 54.7%. Revenue was virtually flat from a year earlier.

IBM Chief Financial Officer James Kavanaugh, in a statement, attributed the company's expanding gross margin to a more profitable mix of products — software was the company's fastest-growing division — as well as "productivity initiatives." IBM announced 3,900 job cuts in January as part of a broader downsizing across the tech sector.

"The productivity benefits free up spend for reinvestment and contribute to margin expansion," Kavanaugh said on a call with analysts.

IBM reiterated Wednesday that it expects between 3% and 5% revenue growth through the end of the year in constant currency. The company forecasts about $10.5 billion in free cash flow in 2023.

IBM's largest division, its software segment, reported $6.6 billion in sales, which was up over 7% from a year ago. Software includes products such as its Red Hat Enterprise Linux operating system and security software.

The part of that division that grew the fastest was data and artificial intelligence products, which were up 10% from a year earlier.

In May, IBM billed WatsonX as a development studio for companies to "train, tune and deploy" machine-learning models, 15 months after the company sold its Watson Health unit.

CEO Arvind Krishna referenced the significance of AI several times in a prepared statement.

"Our focus is an enterprise AI, designed to address these opportunities and solve business problems," Krishna said on a call with analysts. "The list of use cases is long and includes IT operations, good generation, improved automation, customer service, augmenting HR, predictive maintenance, financial forecasting, broad detection, compliance monitoring, security, sales, risk management and supply chain amongst others."

IBM's consulting segment grew over 4% on an annual basis to $5 billion in sales.

The company's infrastructure division, which includes its mainframe sales, declined 14.6% to $3.6 billion in revenue. The drop was driven by lower revenue from its Z Systems servers, which were down 30%.