IBM seeks $3.5B in cost savings for 2025, discretionary spend to be clipped

Workforce rebalancing? Yes, but on the plus side, the next 12 months are all about AI, AI, and more AI

IBM is again forecasting cost savings in the coming calendar year, which likely means one thing for its legions of workers – pedal fast and keep your heads down because headcount reductions may be on the way once more.

Despite a share price bump of nine percent following publication of Big Blue's Q4 and full-year financial results ending December 31 [PDF], the IT mammoth assured analysts on an earnings call that senior management will again look to chop operating expenses.

"Our productivity initiatives have enabled investments in innovation, skills, and go-to-market capabilities, including our ecosystem," said CFO James Kavanaugh. "We have accomplished this while simultaneously growing our operating profit margin and free cash flow, which in turn has increased our financial flexibility.

"This remains our playbook going forward, having executed on $3.5 billion of annual run rate savings exiting 2024, supporting our strong free cash flow growing in excess of revenue."

Free cash flow was $12.7 billion, which IBM says is its strongest in years.

"We expect workforce rebalancing fairly consistent with prior years," said Kavanaugh. "We are also ramping on the $241 million gain from the divestiture of The Weather Company."

In 2024, IBM quietly laid off a low single-digit percentage of the workforce. IBM had 288,000 staff at the end of 2023 and no newer numbers are available.

Kavanaugh also confirmed: "We are cutting back on discretionary-based spend, so we can fuel investment into digital transformation and GenAI overall." Clients are doing the same thing. "We've been seeing that play out throughout 2024," he added.

Don't miss... this analysis of IBM's generative AI push, over on The Next Platform.

This is all part of reshaping IBM from the company it was three years ago to where it wants to be now and the requisite skills the corporation anticipates for the near future. This started with the 2021 sale of the infrastructure services biz, now known as Kyndryl.

As for why the share price rose, IBM reported revenue for Q4 of $17.55 billion, up from the estimated $17.45 billion, and adjusted earnings per share came in at $3.92 versus the consensus of $3.74. Revenue was up 1 percent year-on-year in the quarter and for the full year to $62.8 billion.

Net profit for Q4 was down 11 percent to $2.9 billion and down 20 percent for calendar 2024 to $6 billion. IBM's Software division now accounts for 45 percent of the total revenues, hence higher margins. The profit drop was related to revenue declines in consulting, which also carries high margins.

Software revenue was up eight percent year-on-year in the quarter to $7.92 billion, led by Red Hat, Automation, Transaction Processing, Data & AI, and Security, and for the year jumped to $27.08 billion from $25 billion.

Consulting revenue was down two percent to $5.17 billion in Q4 and dipped to $20.69 billion from $20.84 billion in 2024. The CFO said: "We continue to see clients re-prioritizing their IT spending towards digital transformation and AI initiatives for cost optimization and operational efficiency."

On that note: "Generative AI contributed about $1.5 billion of new bookings in the quarter as clients see the value our extensive industry and enterprise AI expertise can bring to accelerating their digital transformations," Kavanaugh said.

It is nearly three years since IBM's last z Series mainframe was released. As such, revenues generated by the Infrastructure division fell eight percent year-on-year for Q4 to $4.24 billion and were down 4 percent in 2024 to $14 billion, "reflecting product cycle dynamics in our 11th quarter of z16," said the CFO.

"This product cycle has outpaced prior cycles and program-to-date installed MIPS have increased over 30 percent as clients' capacity needs continue to grow. IBM z remains an enduring platform for mission-critical workloads, driving not just hardware adoption, but also the related software, storage, and services."

On the earnings call, CEO Arvind Krishna talked extensively and enthusiastically about AI. No surprises there. "We continue to gain momentum with our GenAI book of business growing to over $5 billion inception-to-date, up by about $2 billion quarter-over-quarter. Approximately one-fifth of this book of business comes from software and the remaining four-fifths is Consulting," he said.

"Our AI portfolio is tailored to meet the diverse needs of enterprise clients, enabling them to leverage a mix of models, IBM's, their own, open models from Hugging Face, Meta, and Mistral. IBM's Granite models designed for specific purposes are 90 percent more cost-efficient than larger alternatives."

He said RHEL AI and OpenShift AI are giving customers a "consistent and scalable AI foundation built on open source technology," with "traction also seen on IBM's WatsonX middleware and AI assistance including Watsonx.gov, Watsonx code assistant for Z, [and] Watsonx Orchestrate."

Of the business landscape, the CEO said: "Geopolitical tensions may be on a better track right now, but certainly not solved. Interest rates, inflation, demographics, lack of skilled labor [and] supply chain, I think these issues all carry over into 2025.

"I would tell you there is more optimism in the business climate and there is more optimism on the growth that is possible in '25 compared to '24. And we know all the reasons for that. Is it pro-innovation, is it pro-growth? Is it pro-regulation, reducing friction? All those things I believe are going to result in a better environment in 2025."

One thing that remains constant with IBM is its ongoing need to reduce costs. Expect more details at IBM's investor day on February 4.

For the year ahead, IBM is estimating 5 percent revenue growth compared to 2024 and free cash flow of $13.5 billion. ®