IBM Beats Q4 Estimates, Bets Big On AI With $2 Billion Generative AI Business

International Business Machines Corp. IBM delivered better-than-expected fourth-quarter results, exceeding analysts’ expectations, and unveiled its big bets on artificial intelligence strategies and offerings.

What Happened: IBM has integrated AI in all of its business segments, from the tools clients use to manage and optimize their hybrid cloud environments, infrastructure, consulting, and its platform products.

“Our book of business related to generative AI now stands at greater than $2 billion inception-to-date. The mix is roughly one quarter software and three quarters consulting signings,” said the CEO and Chairman, Arvind Krishna during the company’s earnings call.

According to its AI strategy, IBM uses a “comprehensive platform approach”. Its hybrid cloud solutions, Rhel.ai and OpenShift AI serve as the foundation of their enterprise AI platform.

“They combine open-source IBM Granite’s LLMs (large language models) and InstructLab model alignment tools with full-stack optimization, enterprise-grade security and support and model indemnification,” added the CEO.

Additionally, IBM watsonx is a platform that combines AI assistance to help both its own and its clients’ businesses to use AI more effectively.

Here is the list of IBM’s AI offerings and how they can be integrated into their clients’ businesses:

IBM’s Granite Models

Granite, which is a family of AI models developed by IBM, is smaller and more cost-effective than LLMs. These models are trained on 116 programming languages and can be customized to specific use cases. IBM has open-sourced these models under the Apache 2.0 license.

Comparing it to the Linux of the AI era, Krishna said that he sees Granite, “Becoming dominant in the enterprise server space, thanks to the speed and innovation offered by open-source.”

InstructLab

IBM has also launched InstructLab, a tool that allows clients to rapidly tune their AI models using their own generated data. This tool can help clients customize their models.

Watsonx Code Assistant for Z

IBM is seeing early momentum in watsonx Code Assistant for Z, a tool that uses AI to help developers write code for IBM Z mainframes. This tool can help to improve developer productivity and reduce errors.

Talking about this offering, the senior VP and CFO, James J Kavanaugh said, “AI middleware, watsonx Assistants, the recently announced IBM Concert, and others contributed about $0.5 billion to our AI book of business inception to date.”

Why It Matters: According to the IBM CEO, their early leadership in AI positions the company for “long-term success and this transformational technology”.

In the fourth quarter, the company reported earnings per share of $3.92, beating analyst estimates of $3.75. Revenue also slightly surpassed predictions, reaching $17.55 billion compared to the anticipated $17.54 billion. This represents a modest increase from the $17.38 billion generated during the same period last year.

A closer look at the results reveals a mixed performance across different segments:

Software: This area showed strong growth with revenue up by 10%.
Consulting: This segment experienced a decline, with revenue down 2%.
Infrastructure: This was the weakest area, with revenue decreasing by 8%.

Price Action: IBM shares closed 1.32% higher on Wednesday and advanced by 8.85% in after-hours to $248.85 per share, outpacing SPDR S&P 500 ETF Trust SPY, which tracks the S&P 500 index, which declined 0.45% to $601.81.

According to the 22 analysts tracked by Benzinga, IBM has a consensus price target of $200.19 per share with a ‘hold’ rating. The highest target price is $260 and the lowest is $139.

The average price target of $233.33 apiece between Morgan Stanley, RBC Capital, and JPMorgan implies a 6.24% downside.