IBM Earnings - What am I looking for?

My thoughts ahead of IBM earnings after the bell today - 23rd July 2025

IBM's Infrastructure Super Cycle is Here

IBM just launched its new z17 mainframe (and the latest version of z/OS) and Power11 servers, kicking off what many are calling a "super cycle" for their infrastructure business. These systems are packed with next-gen AI capabilities, enhanced security features like quantum-safe cryptography and ransomware detection, and are designed for near-zero downtime.

Key takeaway: This isn't just a routine product refresh; IBM is making a big push to capture demand for mission-critical enterprise workloads in the AI era. These new hardware platforms are designed to be the bedrock for complex AI operations, aiming to drive sustained revenue growth in their infrastructure segment. It highlights IBM's commitment to staying relevant in core enterprise computing while integrating cutting-edge AI.

Red Hat Benefiting from VMware's Disruption?

The virtualization market is seeing significant churn following Broadcom's acquisition of VMware, and Red Hat is directly benefiting. With VMware's business model changes causing "mass confusion" and price increases for many users, Red Hat OpenShift Virtualization has seen a massive surge in adoption. Since early 2024, the number of customers has jumped by 178%, production clusters have doubled with a 121% increase, and managed VMs are up over 250% although these numbers are off a tiny base.

Key takeaway: This market disruption is a huge win for IBM's Red Hat. They're quickly becoming a top alternative for enterprises looking to migrate away from VMware. This isn't just about winning new business; it's about Red Hat solidifying its position as a go-to for hybrid cloud virtualization, providing a clear path for organizations to modernize their IT environments.

IBM Consulting's Strategic AI Shift

IBM Consulting is changing its approach to AI, moving beyond short-term projects to focus on delivering sustained operational profit improvements for clients. They've seen a strategic reallocation of AI budgets, with 64% now going towards core business functions. Their generative AI business alone has a book of business over $6 billion inception-to-date, growing by more than $1 billion in Q1 2025.

Key takeaway: This indicates a maturing understanding of how AI delivers value. IBM Consulting isn't just selling individual AI projects; they're aiming to be a strategic partner for large-scale, enterprise-wide AI transformations. This shift is designed to create larger, more comprehensive, and more sustainable revenue streams as clients look for tangible bottom-line impact from their AI investments.

HashiCorp Acquisition Bolsters Hybrid Cloud and AI Automation

IBM recently completed its $6.4 billion acquisition of HashiCorp, a move expected to significantly strengthen its hybrid cloud platform and enhance AI automation capabilities. HashiCorp's tools like Terraform for infrastructure provisioning and Vault for security are now integrated into IBM's automation software portfolio. This deal is projected to be accretive to IBM's adjusted EBITDA within the first 12 months.

Key takeaway: This acquisition isn't just about adding new products; it's about creating a more comprehensive, end-to-end hybrid cloud platform. By combining HashiCorp's strengths in infrastructure automation and security with IBM's existing offerings like Red Hat and watsonx, IBM aims to simplify and secure the complex IT environments needed for large-scale AI deployments, solidifying its competitive position in the hybrid cloud market.

In Summary

IBM is strategically positioning itself for a robust performance, driven by a confluence of factors that signal a multi-faceted growth story. The "Infrastructure Super Cycle," fueled by the new z17 mainframe and Power11 servers, is not merely a product refresh but a targeted effort to capture mission-critical enterprise workloads in the AI era, providing a foundational bedrock for complex AI operations and ensuring sustained revenue growth in this segment.

Concurrently, Red Hat is emerging as a significant beneficiary of VMware's market disruption, experiencing a substantial surge in OpenShift Virtualization adoption as enterprises seek alternatives, solidifying Red Hat's position as a hybrid cloud virtualization leader. IBM Consulting's shift towards delivering sustained operational profit improvements for clients through AI, evidenced by a generative AI book of business exceeding $6 billion, indicates a maturing and more impactful approach to AI integration across core business functions. Finally, the strategic acquisition of HashiCorp, projected to be accretive to adjusted EBITDA within 12 months, significantly strengthens IBM's hybrid cloud platform and AI automation capabilities, creating a comprehensive, end-to-end solution for complex IT environments.

This multifaceted strategy suggests a high likelihood of IBM achieving at least three quarters of high single-digit growth, and should this momentum accelerate into double digits, the stock is poised for a significant upward movement, reflecting investor confidence in IBM's renewed relevance and market leadership in the AI and hybrid cloud landscape.