IBM (IBM -6%) experienced a significant drop despite reporting strong Q1 results. The company posted its second-largest EPS beat in 17 quarters, with revenue increasing by 0.5% year-over-year to $14.54 billion, slightly surpassing expectations. Although Q1 is IBM's smallest revenue quarter, it sets the tone for the year. IBM provided an optimistic Q2 revenue forecast and reaffirmed its FY25 guidance, projecting at least 5% constant currency (CC) revenue growth and $13.5 billion in free cash flow.

• Software Segment: Revenue rose by 7% (9% CC) to $6.3 billion, driven by growth in Red Hat (+13% CC), Automation (+15% CC), Data (+7% CC), and Transaction Processing (+2% CC). Software now constitutes 45% of IBM's business, with 80% recurring revenue. Red Hat's growth was fueled by high-teen bookings, and OpenShift reached $1.5 billion in annual recurring revenue, growing at 25%.
• Consulting Segment: Revenue declined by 2% (flat CC) to $5.1 billion, impacted by clients delaying decisions on discretionary projects. However, IBM saw growth in transformational offerings like Hybrid Cloud and Data, and its generative AI business exceeded $5 billion since inception.
• Infrastructure Segment: Revenue decreased by 6% (4% CC) to $2.9 billion. Hybrid Infrastructure fell by 7% CC, with IBM Z down 14% CC and Distributed Infrastructure down 4% CC. The focus is on the z17 mainframe launch in mid-2025, which promises enhanced AI acceleration and improved performance over the z16.
• Macro View: IBM noted client uncertainty may lead to a cautious approach, with some areas experiencing demand volatility. Consulting is particularly susceptible to discretionary pullbacks, but no significant change in client behavior was observed early in Q2, supporting the reaffirmation of FY25 guidance.

Overall, IBM's Q1 performance and guidance were strong, marking the first time in several quarters that specific revenue guidance was provided. However, macroeconomic concerns, especially within the Consulting segment, pose challenges. The upcoming z17 launch could be better timed given the current uncertainty.