(Reuters) -IBM recorded a slowdown in growth in its key cloud software segment, overshadowing booming AI-driven demand for the company’s new mainframe that drove third-quarter sales and profit above Wall Street estimates on Wednesday.
Slower growth in IBM’s hybrid cloud segment, housed within its software unit, raised alarm bells across investors betting heavily on Big Blue’s ability to benefit from booming demand for cloud services, as artificial intelligence adoption rises.
The company’s shares, which have risen about 30% so far this year, fell nearly 4% in extended trading.
IBM recorded third-quarter revenue of $16.33 billion, beating analysts’ average estimate of $16.09 billion, according to data compiled by LSEG.
The company’s adjusted profit of $2.65 per share for the September quarter also came in above estimates of $2.45.
However, sales in the hybrid cloud unit, also known as Red Hat, grew about 14%, decelerating from 16% growth in the previous quarter. The software segment grew 10% to $7.21 billion, coming in just slightly above estimates.
“Although IBM beat expectations handsomely on earnings and revenue … a slowdown in Red Hat revenue and software sales from 16% to 14% will disappoint some that were hoping for accelerating growth in what is a high-margin segment,” said Michael Ashley Schulman, chief investment officer at Running Point Capital.
Still, the infrastructure segment, housing its mainframe, saw revenue rise 17% to $3.56 billion in the quarter.
The new mainframe, which is powered by chips specialized for AI applications, is being widely used by the financial industry, allowing for the maintenance of strict data residency and encryption rules as they work on adopting AI tech, CFO Jim Kavanaugh told Reuters.
“Addressing client pain points, around AI, around sovereignty … that is driving the client buying behavior overall.”
IBM’s AI book of business grew to $9.5 billion, up $2 billion from the second quarter.
IBM also raised its outlook for the current fiscal year, expecting revenue to grow more than 5% at constant currency, up from its prior forecast of at least 5% growth.
(Reporting by Arsheeya Bajwa; Editing by Maju Samuel)
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