The economy is getting weird, but International Business Machines (IBM -8.25%) isn't feeling much of an impact. The tech giant's main pitch is that it can help its customers boost productivity, increase efficiency, and ultimately save on costs. That pitch appears to be resonating with the giant enterprises that IBM serves.
Adjusted for currency, IBM's revenue rose 4% year over year in the first quarter, and the company expects full-year growth to come in between 3% and 5%. That's in line with its mid-term plan to generate mid-single-digit revenue growth annually. Software and consulting, which together constitute around 75% of IBM's revenue, expanded by 6% and 8%, respectively, while infrastructure revenue held steady.
Widening margins
IBM's goal is to for free cash flow growth to outpace revenue growth. The plan is to boost free cash flow by a high-single-digit percentage annually. This year, the company continues to expect free cash flow of approximately $10.5 billion, up about $1 billion from 2022.
Achieving this kind of growth means that IBM's profit margins must expand, and that's exactly what the company accomplished in the first quarter. Adjusted gross margin came in at 53.7%, up 80 basis points from the prior-year period. The consulting segment, which accounted for about 35% of total revenue, saw its gross margin jump by 90 basis points.
A big chunk of IBM's consulting activity centers around digital transformations -- that is, helping its customers move to and manage hybrid cloud infrastructures. This helps drive software revenue, particularly software from Red Hat. RedHat's OpenShift, an enterprise hybrid cloud platform, reached $1 billion of annual recurring revenue in the first quarter.
IBM's adjusted pre-tax margin rose by 130 basis points year over year in Q1 after excluding costs related to its recent layoffs. While pre-tax margin was unchanged in the software segment, the consulting and infrastructure units boosted their own pre-tax margins by 50 basis points and 80 basis points, respectively. GAAP operating expenses were down about 4% as the impact of those layoffs flowed through to the income statement.
A cheap stock
Despite a tough economic environment, IBM is confident that it will deliver on its full-year guidance. Assuming the company does produce $10.5 billion in free cash flow this year, the stock trades for just 11 times that free cash flow figure based on the current market capitalization.
On top of a rock-bottom valuation, IBM remains one of the best dividend stocks around. The latest quarterly dividend of $1.65 per share works out to a dividend yield of 5.2%. That dividend will eat up just shy of $6 billion over the next year, leaving plenty of free cash flow left over for debt reduction.
IBM has paid consecutive quarterly dividends since 1916, and following a small dividend boost announced last April, the company marked 27 consecutive years of dividend increases. Investors shouldn't expect anything more than a small increase this year, but an announcement should be coming before the end of the month.
IBM's various businesses are centered around helping its customers improve their own operations. Its hybrid cloud platform is tailor-made for large enterprises with complex infrastructures looking to shift to the cloud, and the company's AI-enabled products can help drive efficiencies. As businesses focus on cutting costs, IBM is in a position to help them do exactly that. Even in a tough economy, IBM should be able to boost margins further as it grows its software and consulting segments.
