IBM Q2 2024 Results: AI-Driven Growth Boosts Revenue and Free Cash Flow

Economic

Summary:

Explore IBM's Q2 2024 financial results, showcasing 2% revenue growth and increased free cash flow. Learn how AI initiatives, hybrid cloud strategy, and quantum computing advancements are shaping IBM's future in this comprehensive analysis.

IBM has announced its financial results for the second quarter of 2024, showcasing a strong performance driven by substantial revenue growth, profitability, and increased free cash flow. This article delves into the key highlights of IBM's Q2 2024 financial results, examining the factors contributing to its success and the strategic initiatives that are shaping its future.

Revenue and Profitability

IBM reported a revenue of $15.8 billion for Q2 2024, representing a 2% increase year-over-year and a 4% increase at constant currency. This growth was primarily driven by the company's robust performance in its software and infrastructure segments.

Software Revenue

Up 7% year-over-year, 8% at constant currency. This growth was fueled by the integration of AI capabilities into IBM's software offerings, particularly through the expansion of its watsonx platform.

Infrastructure Revenue

Increased by 1% year-over-year, 3% at constant currency. The demand for IBM's hardware platforms, especially IBM Z, played a significant role in this growth.

Consulting Revenue

Experienced a slight decline of 1% year-over-year but saw a 2% increase at constant currency. This segment faced challenges due to economic pressures but showed resilience through application modernization services.

Profit Margins

IBM's profit margins also saw notable improvements:

Gross Profit Margin: GAAP gross profit margin stood at 56.8%, up 180 basis points, while the non-GAAP operating gross profit margin was 57.8%, up 190 basis points.

Pre-Tax Income Margin: GAAP pre-tax income margin was 14.1%, up 110 basis points, and the non-GAAP operating pre-tax income margin was 17.7%, up 220 basis points.

Cash Flow and Balance Sheet

IBM's cash flow and balance sheet metrics were strong indicators of its financial health:

Net Cash from Operating Activities: $2.1 billion for the quarter, down $0.6 billion year-over-year.

Free Cash Flow: $2.6 billion for the quarter, up $0.5 billion year-over-year. For the first six months of 2024, free cash flow was $4.5 billion, up $1.1 billion year-over-year.

Cash and Marketable Securities: IBM ended the quarter with $16.0 billion in cash, restricted cash, and marketable securities, up $2.5 billion from year-end 2023.

Strategic Focus on AI and Hybrid Cloud

IBM's strategic focus on AI and hybrid cloud has been a significant driver of its recent success. The company's AI initiatives, anchored by the watsonx platform, have been instrumental in enhancing automation and productivity for its customers. This has led to increased demand for IBM's software solutions, contributing to the 8% growth in software revenue.

AI-Powered Software Growth: Innovations in watsonx, such as watsonx Orchestrate, have allowed IBM to integrate AI capabilities into its software offerings, driving substantial growth.

Hybrid Cloud Strategy: Red Hat, a cornerstone of IBM's hybrid cloud strategy, saw significant contributions to growth, with OpenShift annual bookings growing over 40%.

Quantum Computing Advancements

IBM continued to advance its quantum computing capabilities during the second quarter. The company expanded its open-source quantum computing software, Qiskit, into a comprehensive stack aimed at optimizing performance on utility-scale quantum hardware. These efforts are positioning IBM as a leader in the emerging field of quantum computing.

Full-Year 2024 Expectations

Given the strong performance in the first half of 2024, IBM has raised its full-year expectations for free cash flow to over $12 billion. The company continues to anticipate mid-single-digit revenue growth at constant currency, despite potential headwinds from foreign exchange rates.

Conclusion

IBM's Q2 2024 financial results highlight the company's resilience and strategic acumen in leveraging AI and quantum computing to drive growth. Despite broader macroeconomic challenges, IBM's innovation-led approach has strengthened its market position, particularly in the software and infrastructure segments. As IBM continues to navigate the complexities of the global economic landscape, its commitment to innovation and client-centric solutions will be vital to sustaining growth and maintaining its competitive edge.

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Data Interpretation

The U.S. Bureau of Labor Statistics released the latest June JOLTS job openings data on July 30:

June job openings came in at 8.184 million, compared with the expected 8 million and the previous reading of 8.23 million (revised).

The ratio of job openings to the number of unemployed stood at 1.2:1, unchanged from the previous month.

In June, the job openings rate remained at 4.9%. The ratio of job openings to the unemployed was flat with the figures from April and May. Over the past two years, this ratio has shown an overall declining trend and has now returned to its long-term levels.

Breaking it down by industry, the recent increase in job openings was primarily driven by the accommodations and food services sector, alongside a significant rise in openings within state and local government positions (excluding education). There was a notable reduction in job openings within the durable goods manufacturing sector, marking the largest decline in two years, and a decrease was also observed in federal government job openings.

Hires: Dragged down by the leisure and hospitality and business services sectors, the number of hires fell to its lowest level since the outbreak of COVID-19, at 5.3 million. The hires rate was 3.4%, a four-year low.

Separations: The number of total separations was 5.1 million, representing a separations rate of 3.2%. The number of quits was 3.3 million, a decrease of 434,000 compared with the same period last year and the lowest level since August 2020. The quits rate remained unchanged at 2.1%. The number of layoffs and discharges changed little at 1.5 million, and the rate decreased to 0.9%.

Overall, JOLTS job openings have broadly shown a steady decline since March 2022, when they hit a record 12.18 million. The current JOLTS job openings data exceeded most economists' expectations, suggesting that labor market resilience continues.

June JOLTs Job Openings

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Kevin Du

Cryptocurrency

Former MicroStrategy CEO Michael Saylor made three potential predictions for Bitcoin by the time it reaches 2045. He predicted a bear case where Bitcoin could reach $3 million per coin, a base case of $13 million, and a bull case of massive $49 million per coin.

Saylor's comments come at a time when more institutions are gaining exposure to the crypto market through Bitcoin and MSTR remains dependent on BTC performance. Saylor has often discussed BTC's role in fighting inflation but Bitcoin's long-term value has a deeper bet.

Bitcoin could reach $13 million valuation per coin

At the Bitcoin 2024 Conference, former MicroStrategy CEO Michael Saylor made a bold forecast for Bitcoin (BTC). According to him, over the next two decades, there could be three potential scenarios for the largest cryptocurrency by market cap.

The first case is a bear case of Bitcoin price reaching $3 million per coin. Saylor's base case is of $13 million per coin, and a bull case of a staggering $49 million per coin by 2045.

Interestingly, Saylor's base case prediction is almost a 30% increase from his previous projection of $10 million. In June this year, the former chief of MSTR called Bitcoin an "economic immortality" in a podcast while predicting its journey to $10 million.

A $10 million price point pushes BTC's market capitalization to around $210 trillion on a fully diluted basis. At a 21 million cap, Bitcoin's market cap can propel to $273 trillion. Meanwhile, considering Bitcoin has not even touched $1 million in value, the implications of a bull case valuation can potentially reshape the global financial market by 2045.

The annualized rate of return for Bitcoin under Saylor's predictions range from 21% to 37% by 2045. If Bitcoin reaches a price point of $49 million by 2045, it'll form 22% of all assets by touching a capitalization of $1,000 trillion as per Saylor.

Saylor eyes Bitcoin holdings by corporations

In several posts on X, Saylor underlined his bullish stance on Bitcoin. He cited investor Bill Miller who believes there is a growing trend of companies integrating Bitcoin into their balance sheets as a strategic treasury asset.

The former CEO of MicroStrategy has often suggested that BTC plays a role as a hedge against inflation. He reposted, "We now have additional companies coming out and saying we're going to put #Bitcoin on our balance sheet as a strategic treasury asset," a statement originally made by Bill Miller. Michael Saylor Bets on Bitcoin's Bullish Future but Is $270T Market Cap Achievable?_1

Michael Saylor Bets on Bitcoin's Bullish Future but Is $270T Market Cap Achievable?_1

Saylor has also been taking every opportunity to point to Bitcoin's public mention. He recently welcomed former President Donald Trump's proposal to adopt Bitcoin as a strategic reserve asset for the United States if he is elected. In response, Saylor called it a "historic move" which "shows that #Bitcoin is winning." Saylor hints at these developments to probably say Bitcoin serves as a solution to inflation and could become a strategic reserve asset on a national scale.

MicroStrategy has made a strategic BTC bet

MicroStrategy Inc. (MSTR), under Saylor, became the largest public holder of Bitcoin. As of June 21, the data by Bitcoin Treasuries notes that the company holds 226,331 coins. At the time of writing, MSTR stock price is close to $1,620 and the market capitalization has surpassed $28 billion. If Saylor's predictions comes true, MicroStrategy's bet on Bitcoin will massively escalate the company's valuation and enterprise value, which at press time stands at $33.42 billion.

Since first reporting its BTC balance on August 11, Bitcoin's value relative to USD has surged by 456%. When compared to Bitcoin, the stock price has increased by 135%. The math seems to suggest that the return on BTC investment could further snowball the stock price. Michael Saylor Bets on Bitcoin's Bullish Future but Is $270T Market Cap Achievable?_2

Michael Saylor Bets on Bitcoin's Bullish Future but Is $270T Market Cap Achievable?_2

Therefore, it's important to point out that Saylor has a vested interest in Bitcoin's price increase. And so all potential price surge and bull predictions should be viewed with that in mind. That said, over the last year, Bitcoin has increased its value by 127% as per CoinGecko analysis.

Source: Crypto News

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Economic

The UAE and Saudi Arabia were the preferred destinations for investors with 152 merger and acquisition deals hitting a total disclosed value of $9.8 billion as the Mena region witnessed a slight increase in M&A activity in the first half of 2024.

The UAE registered the region's largest transaction with the acquisition of Truist Insurance Holdings by Clayton Dubilier & Rice, Stone Point Capital and Mubadala Investment for $12.4 billion

Both countries, the two largest Arab economies, were also among the top Mena bidder countries in terms of deal volume and value, indicating their active participation in the region's M&A landscape, according to the EY Mena M&A Insights H1 2024 report.

The Mena M&A activity rose to 321 deals amounting to $49.2b. When compared to H1 2023, deal volume this year grew by 1.0 per cent, while deal value saw a rise of 12 per cent.

Sovereign wealth funds (SWFs), such as Abu Dhabi Investment Authority (Adia) and Mubadala from the UAE and the Public Investment Fund (PIF) from Saudi Arabia, continued to lead the deal activity in the region to support their countries' economic strategies.

"Dealmaking got off to a promising start in 2024 despite oil price fluctuations. We saw a surge in cross-border M&A value as companies made investments to further build synergies, expand market presence, and gain strategic advantages on a global scale. In particular, the first half of the year found the UAE to be a favoured investment destination due to its business-friendly regulations and efficient legislative framework," said Brad Watson, EY Mena Strategy and Transactions Leader.

Watson said Mena countries continued to strengthen regional relationships with Asian and European countries, alongside existing ties with the US, enabling them to gain access to larger and growing markets.

During the first six months of 2024, cross-border M&As played a significant role, contributing to 52 per cent of the overall volume and 87 per cent of the value, marking a 15 per cent y-o-y growth in value. Meanwhile, domestic M&A activity accounted for 48 per cent of the total number of deals.

The US remained the preferred target destination for Mena outbound investors with 19 deals amounting to $16.6 billion. With the US-UAE Business Council playing an active role in promoting partnerships, prominent US companies are collaborating with UAE public and private sector stakeholders on various initiatives.

Ten of the Mena region's highest-valued M&As in the first six months of 2024 were concentrated in the GCC region. The largest transaction took place in February 2024, when Clayton Dubilier & Rice, Stone Point Capital and Mubadala Investment announced their acquisition of Truist Insurance Holdings for $12.4 billion. In March 2024, PAG, Mubadala and Adia invested $8.3 billion in a 60 per cent stake in the Chinese shopping mall company Zhuhai Wanda Commercial Management Group. In June 2024, Abu Dhabi Future Energy Company (Masdar) agreed to acquire a 67 per cent stake in the Greek company Terna Energy for $2.9 billion.

Insurance and real estate were the most attractive sectors for investors in the first six months of the year, accounting for 47 per cent of the total deal value. Saudi led in the lists of target countries as well as bidder countries, with the UAE, Morocco, Bahrain and Egypt featured in both rankings as well.

The first half of 2024 saw 155 domestic deals with a combined disclosed value of $6.4 billion, marking a 13 per cent increase in M&A activity. GCC players were involved in 85 per cent of the deals, reflecting a high level of intra-regional M&A activity. There were 94 deals within and between the UAE and Saudi Arabia, accounting for 61 per cent of the overall domestic M&A deal volume.

The real estate (including hospitality and leisure) sector became the main contributor to deal value with 15 deals amounting to $1.3 billion, driven by increasing tourism, upcoming mega projects and a growing middle-class income. The consumer products and technology sectors witnessed 47 deals in the domestic market, representing 30 per cent of the total volume.

"M&A, in the recent past, has been the beneficiary of significant tail winds such as low cost of capital. It is heartening to see regional M&A activity remain robust despite the higher cost of capital. The resilience of the regional M&A markets is underpinned by stable oil price and continued infrastructure spending by local governments," said Anil Menon, EY Mena head of M&A and Equity Capital Markets Leader.

Source: Khaleej Times

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Daily News

[Quick Facts]

1. Israeli airstrike on southern Beirut.

2. Microsoft's Azure growth slows, disappointing investors.

3. AMD delivers upbeat sales forecast as it shifts to AI chips.

4. Jiji Press: BOJ considering raising short-term rates to around 0.25%.

5. Bond investors expect the Fed to maintain rates.

6. U.S. job openings exceed expectations and layoffs decrease.

[News Details]

Israeli airstrike on southern Beirut

On July 31, a deadly airstrike in the southern suburb of Lebanon's capital Beirut killed three people and wounded 74. On the evening of July 30, an Israeli drone targeted a Hezbollah location in the southern suburb of Beirut. The drone reportedly fired three missiles, causing a building to collapse.

The Israeli military conducted a "precision strike" In Beirut to eliminate Hezbollah commander Fouad Shukr, a senior advisor to Hezbollah leader Hassan Nasrallah, according to a statement by the Israel Defense Forces on July 30. Israel blamed this commander for a recent attack on the town of Majdal Shams in the Israeli-occupied Golan Heights.

Microsoft's Azure growth slows, disappointing investors

Microsoft Corp.'s Azure cloud-computing service posted a slowdown in quarterly growth, disappointing investors anxious to see a payoff from huge investments in artificial intelligence products. Microsoft shares fell about 7% in extended trading. Despite a 15% increase in total revenue to $64.7 billion and adjusted earnings per share of $2.95 in the quarter ending June 30, both exceeding expectations, Azure's revenue growth of 29% fell short of the previous quarter's 31%. In recent weeks, anxious investors have grown impatient with tech companies' efforts to profit from their massive investments in the AI sector. Last week, Alphabet's shares also dipped due to rising costs overshadowing strong sales.

AMD delivers upbeat sales forecast as it shifts to AI chips

Advanced Micro Devices Inc. (AMD) gave an upbeat revenue forecast for the current quarter, signaling that its new artificial intelligence processors are helping bolster growth. Revenue will be roughly $6.7 billion in the third quarter, the chipmaker said in a statement Tuesday. Analysts' average forecast is $6.62 billion. This outlook indicates that AMD is making progress in catching up to Nvidia, which dominates the AI accelerator market. AMD is Nvidia's nearest rival in the accelerator market, but still trailing by a wide margin. The hope is to gain more of the money that data-center operators such as Microsoft Corp. and Meta Platforms Inc. are pouring into the creation of AI tools. Following the earnings report, AMD's shares rose more than 5% in extended trading.

Jiji Press: BOJ considering raising short-term rates to around 0.25%

The Bank of Japan (BOJ) is considering raising short-term interest rates to around 0.25% from the current 0-0.1% at its two-day policy meeting that ends on Wednesday, the Jiji news agency reported. In March this year, the BOJ decided to end its eight-year-long negative interest rate policy and abandoned its yield-curve control, a move underscoring its determination to steadily exit large-scale monetary stimulus. The central bank will further raise interest rates if there is confidence that rising wages will drive up service prices and keep the inflation rate near the 2% target over the long term, BOJ governor Kazuo Ueda once said. While many market participants expect the BOJ to hike short-term interest rates this year, they are divided on the timing of the hike.

Bond investors expect the Fed to maintain rates

Bond investors anticipate that the Fed will hold rates steady this week but signal future rate cuts. They are betting that the U.S. Treasury yield curve will become less inverted and eventually return to a normal positive slope. The strategy involves bullish bets on short-dated Treasuries and reducing longer-dated exposure, a trade referred to as a "steepener" which pushes yields on longer-dated Treasuries higher than short-term maturities. Investors are compensated with a higher yield for taking risks over a longer period.

The widely watched two-year/10-year yield curve has been inverted for two years, the longest inversion in history, with the gap in yield at minus 22 basis points.

U.S. job openings exceed expectations and layoffs decrease

On Tuesday, The U.S. Bureau of Labor Statistics reported 8.184 million job openings in June, exceeding most economists' forecasts. Despite reduced hiring and slower wage growth, labor demand remained strong, showcasing the labor market's continued resilience. The unemployment rate rose for the third consecutive month in June, aligning with the recent uptick in jobless claims. The softness in the labor market and easing inflation lead many economists to expect Fed Chair Jerome Powell to signal at the end of this week's policy meeting that the central bank may soon start cutting interest rates.

[Today's Focus]

UTC+8 11:00 BOJ Interest Rate Decision

UTC+8 14:30 BOJ Governor Kazuo Ueda Holds Monetary Policy Press Conference

UTC+8 17:00 Eurozone HICP (Jul)

UTC+8 20:15 U.S. ADP (Jul)

UTC+8 20:30 Canada GDP YoY (May)

UTC+8 22:00 U.S. Pending Home Sales Index (Jun)

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Forex

Round-up

Further unwinding in big tech is the takeaway from Wall Street overnight, as sky-high earnings expectations are now put to the test with a series of tech heavyweight results up ahead. Microsoft’s after-market earnings provided an example of how stringent investors can get, looking beyond the usual top and bottom-line beat with focus on how artificial intelligence (AI) investments have been paying off.

That said, market appetite for risk-taking is still in place, as traction towards more value-focused sectors signal a rotation rather than a reversal. Seven out of 11 S&P 500 sectors closed in the green overnight, while the DJIA and Russell 2000 edged higher.

Attention will be turned to the upcoming Federal Open Market Committee (FOMC) meeting ahead. With a September rate cut fully priced by markets, further validation from the Federal Reserve (Fed) is now on the radar. However, the bigger question may revolve around what comes after, as market pricing for back-to-back rate cuts through the rest of the year may seem challenging for the Fed to acknowledge. A broadly data-dependent stance after September seems to be the likely scenario, which may offer some near-term stability for the US dollar.

USD/SGD consolidating within a broader downward trend?

The USD/SGD has been stuck in a near-term consolidation following a move to its four-month low, as broadly weaker US economic data seems to anchor the case of a September rate cut from the Fed. A breakdown of an upward trendline earlier this month may seem significant, which suggests sellers in greater control for now, as its daily relative strength index (RSI) struggled to cross back above its mid-line.

Ahead, the 1.336 level may be on watch as immediate support to hold, where a lower channel trendline support may stand. Given the lower highs, lower lows formation since April this year, any bounce may still leave selling-on-tops in focus, with near-term resistance to be found at the current upper consolidation range at the 1.346 level, followed by the 1.357 level. USD/SGD in Near-Term Consolidation, USD/CAD Eyeing Nov 2023 High_1

USD/SGD in Near-Term Consolidation, USD/CAD Eyeing Nov 2023 High_1

USD/CAD eyeing retest of November 2023 high

The story seems to be different for USD/CAD however, which surged as much as 1.8% over the past weeks to register its highest level since November 2023. This follows as weaker growth prospects have prompted the Bank of Canada (BoC) to embark on an aggressive rate-cutting cycle, with the central bank trimming its key policy rate for the second month in a row to 4.5% and guiding for more to come.

On the weekly chart, having broadly been trading within a consolidation range since September 2022, the upper resistance edge is now put to the test, with any upward break likely to carry heavy significance after failing to do so on at least four previous occasions. Its weekly RSI has managed to defend its mid-line for now, which kept an upward bias intact. Any retracement on near-term overbought technical conditions could bring the 1.359 level into focus as immediate support to hold. USD/SGD in Near-Term Consolidation, USD/CAD Eyeing Nov 2023 High_2

USD/SGD in Near-Term Consolidation, USD/CAD Eyeing Nov 2023 High_2

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Cohen

Economic

China's manufacturing activity in July shrank for a third month, an official factory survey showed on Wednesday, keeping alive expectations Beijing will need to launch more stimulus as a protracted property crisis and job insecurity drag on growth.

The official purchasing managers' index (PMI) fell to 49.4 in July from 49.5 in June, below the 50-mark separating growth from contraction but beating a median forecast of 49.3 in a Reuters poll.

The world's second-largest economy grew much slower than expected in the second quarter, with the consumer sector a particular cause for concern. Retail sales growth sank to an 18-month low as deflationary pressures forced businesses to slash prices on everything from cars and food to clothes.

While half of the 300 billion yuan ($41.40 billion) in ultra-long treasury bonds China's state planner announced on Thursday will be allocated to support a programme of consumer trade-ins, that amount is seen as too little to meaningfully boost economic recovery, as it is equivalent to just 0.12% of economic output and 0.3% of 2023's retail sales.

Solid Chinese exports have provided some support to factory managers in recent months and propped up progress towards the government's growth target of around 5%, but as a growing number of trade partners consider import tariffs, the jury is out on whether that boost can be sustained.

Outbound shipments grew at their fastest pace in 15 months in June, while imports unexpectedly shrank, suggesting domestic demand remained weak and manufacturers were frontloading orders to get ahead of tariffs from trade partners.

Meanwhile, non-manufacturing activity expanded more slowly in July, pointing to slowing domestic demand for services and reinforcing how troubling a years-long crisis in the property sector is.

The official non-manufacturing purchasing managers' index (PMI), which includes services and construction, slowed to 50.2 from 50.5 in June.

Depressed domestic consumption is closely related to falling property valuations that have left families feeling poorer as 70% of household wealth is in real estate.

New home prices fell at their fastest pace in nine years in June.

Analysts expect the government to implement another round of property-supporting policy measures after a meeting of the Politburo, a top decision-making body of the ruling Communist Party this week.

On Tuesday, state media reported China will step up its macroeconomic policy and counter-cyclical adjustments and expand domestic demand by stimulating consumption.

Source: Reuters

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IBM Q2 2024 Results: AI-Driven Growth Boosts Revenue and Free Cash Flow