(Reuters) -IBM surpassed fourth-quarter profit estimates on Wednesday, driven by robust demand in its software unit as businesses ramped up IT spending, sending the company's shares soaring about 10% in extended trading.
The software segment recorded its biggest revenue jump in five years, as customers prioritized spending on cloud infrastructure amid a rush to adopt the data-intensive generative artificial intelligence technology.
"When you see more growth come from software, that comes with a lot better margins," said Matt Swanson, analyst at RBC Capital Markets.
IBM also forecast revenue growth of at least 5% at constant currency for fiscal 2025, higher than the 3% increase seen in 2024.
This suggests "confidence in (IBM's) AI and cloud strategy", said Michael Schulman, chief investment officer of Running Point Capital.
IBM's AI Book of Business — a combination of bookings and actual sales across various products — stood at more than $5 billion inception-to-date, up about $2 billion from the third quarter.
The company made its "Granite" family of AI models open-source in May, in contrast to rivals such as Microsoft, which charge for access to their models.
IBM's approach is in line with Chinese startup DeepSeek, which last week launched a free AI assistant that it said uses less data at a fraction of the cost of incumbent services, fueling concerns over the dominance of U.S. tech.
"DeepSeek was an initiation that open (source) AI can play a role in the overall GenAI space," IBM Chief Financial Officer James Kavanaugh told Reuters in an interview.
He, however, declined to provide details on whether IBM plans to offer DeepSeek's models on its Watsonx platform, which helps users in tasks such as deploying chatbots.
CONSULTING WEAKNESS
IBM's AI book is dominated by its consulting business, which accounts for about 80% of it. Software forms the rest.
But revenue from the consulting segment fell about 2% to $5.2 billion in the quarter. Software sales grew more than 10%.
Companies have focused spending on longer-term consulting deals, centered around integrating AI in their businesses, which is yet to be reflected in IBM's revenue.
Total revenue was relatively flat at $17.55 billion for the quarter and largely in line with analysts' estimates, according to data compiled by LSEG.
IBM's fourth-quarter adjusted per-share earnings of $3.92 compared with estimates of $3.75.
(Reporting by Arsheeya Bajwa in Bengaluru; Editing by Shilpi Majumdar)
