Information technology (IT) products and services company, International Business Machines Corporation (IBM), reported revenue of $15.5 billion in the second quarter of 2022, which increased 9% year-over-year. The company’s software segment reported revenue of $6.17 billion, which showed an increase of 6%, while revenue from its consultancy segment increased over 10% to $4.81 billion. The growth indicates that the demand for mainframe computers and consulting, and cloud services remains strong despite concerns about reduction in tech spending.
Rising Costs of Labor
The company’s gross margin stood at 53.4%, which was higher than market expectations but lower than 55.2% year-over-year. Consulting, which constitutes more than half of IBM’s workforce, is most affected by the inflationary labor market and rising labor costs, which the company is trying to address through higher pricing. However, given the time from the signing of contract to realization of revenue, the pricing strategy will take time to reflect in the company’s margins.
Unfavorable Macroeconomic Environment
IBM reduced its free cash-flow projections for 2022 owing to the impact of a strong currency and the decline in business in Russia, which pulled down the share price by 4%. A rising US dollar hindered the growth of tech companies such as Oracle Corp., Salesforce Inc., and Microsoft, which have considerable exposure to foreign markets. IBM, with nearly half of its revenue coming from outside the US, expects a 6% reduction in sales revenue in 2022 owing to the higher exchange rate. According to the company, the Q2 sales decreased by $900 million as a result of the strong US dollar.
Outlook
IBM surpassed investor expectations with second-quarter sales of $15.54 billion due to robust demand for its solutions in consulting and infrastructure divisions. The company pinned its hopes on the "hybrid cloud" services and high-growth software and consultancy business. In November 2021, IBM spun off its managed infrastructure services division into the publicly listed Kyndryl, and sales to Kyndryl continue to account for a significant portion of IBM’s revenue. Despite geopolitical unrest and inflationary pressures, IBM expects its revenue to continue to grow, notably in regions such as Europe and Asia-Pacific.
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