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IBM (IBM +13%) traded sharply higher today to a new all-time high after reporting strong Q4 results last night. It reported nice EPS upside, only its second double-digit EPS beat in the past six quarters. Revenue rose 1% yr/yr to $17.55 bln, which was in-line. We think the guidance is playing a key role in the big move today.

• Quickly on the guidance, IBM's FY25 guidance of +5% CC (constant currency) sales growth may not sound like a lot but it is a notable improvement from FY24's +3% CC result. Also, IBM's FY25 free cash flow guidance of $13.5 bln is a nice improvement from FY24's $12.7 bln number.
• As has been the case in recent quarters, its Software segment was the star of the show with revenue up +10.4% (+11.5% CC) to $7.9 bln with strength across key categories of Red Hat (+17% CC), Automation (+16% CC), Data & AI (+5% CC) and Transaction Processing (+11% CC). Software is now about 45% of IBM's business, with more than $15 bln of ARR growing at double digits.
• IBM continues to see momentum in Red Hat, fueled by six consecutive quarters of double-digit bookings growth. This is reflective of continued demand for its hybrid cloud platform as clients are prioritizing application modernization on OpenShift containers and Ansible automation to optimize their IT spend. OpenShift is now $1.4 bln ARR business, growing about 25%.
• Consulting segment revenue was down -2% (-1.1% CC) to $5.2 bln. IBM continues to see clients reprioritizing their IT spending towards digital transformation and AI initiatives for cost optimization and operational efficiency. Infrastructure segment revenue was down -7.6% (-6% CC) to $4.3 bln, reflecting product cycle dynamics. This is the 11th quarter of z16 availability. Nearly three years in, IBM noted this product cycle has outpaced prior cycles.
• Breaking down the +5% CC FY25 revenue guidance by segment, IBM sees Software approaching double digit growth, led by Red Hat in the mid-teens. In Consulting, IBM sees growth in the low single digits. And with a new mainframe launch in mid-2025, IBM expects Infrastructure to be about a point contribution to IBM's overall revenue growth.

Overall, this was an impressive way to wrap up FY24. What really stood out is its robust Software segment, that keeps growing strongly and is now 45% of sales. The FY25 guidance was quite positive as well. That +5% CC revenue growth may not sound like much but IBM has not had a 5% sales growth in any quarter since 3Q22. So to forecast that for a full year this early in the year is a sign that management is bullish on its prospects. Its Software segment is really booming right now.