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IBM posted better-than-expected second-quarter financial results, driven by strength in both software and services.

For the quarter, the enterprise tech giant reported revenue of $18.75 billion, up 3% from a year ago, and about $450 million ahead of the Street consensus at $18.3 billion. Adjusted for currency and divestitures, revenue was about flat compared with a year earlier.

The stock gained 3.2% to $142.60 in after-hours trading.

IBM (ticker: IBM) said non-GAAP profits were $2.33 a share, four cents above the Street consensus view of $2.29 a share, up 7% from a year ago. Under generally accepted accounting principles, the company earned $1.47 a share. On a non-GAAP basis, gross margin inched up 0.3 percentage point to 49.3%, while pretax net income was up 0.7 of a point, or 70 basis points, to 13.5%.

Revenue in the companys cloud and cognitive software segment was $6.1 billion, up 6.1%, or 2.5% in constant currency, and ahead of the Street consensus forecast of $5.9 billion.

Global Business Services revenue was $4.3 billion, up 11.6%, or 7.3% in constant currency, and ahead of the consensus estimate of $4.1 billion.

Global Technology Services, the companys IT outsourcing business, had revenue of $6.3 billion, up 0.4%, but down 4.1% adjusting for currencya result that was slightly above Street expectations. Systems revenue, which includes mainframes, was down 7.3%, or 10.2% adjusting for currency.

IBM said total cloud revenue in the quarter was $7 billion, up 13%, or 9% adjusted for currency, which was a deceleration from the first quarter, when the company posted 21% growth, or 18% adjusted for currency. Revenue at Red Hat was up 20%, or 17% adjusted for currency, an acceleration from 17% reported growth (15% adjusted for currency) in the March quarter.

IBM repeated its previous forecast for full-year adjusted free cash flow of $11 billion to $12 billion, excluding $3 billion of expenses related to cost reduction moves and the pending spinoff of the Kyndryl services business.

We built on our progress last quarter, IBM CFO Jim Kavanaugh said in an interview with Barrons. This is a continuation of that. Clients are adopting our hybrid cloud model. He notes that IBM has paid down almost $6.5 billion in debt through the first half, and has now reduced borrowings by $18 billion since it completed its acquisition of Red Hat in July 2019.

Kavanaugh said the Kyndryl transaction is on track to be completed by year-end.

Asked about the environment for IT spending, Kavanaugh said that conditions are encouraging. He said that demand has improved in markets that are recovering from the pandemic, with revenue growth in the latest quarter in the U.S., Canada, the U.K., France, Italy, and Spain. Kavanaugh cited continued challenges in some Asian markets, including India.

Write to Eric J. Savitz at eric.savitz@barrons.com

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IBM's Revenues and Profits Beat Forecasts. Software and Services Were Key. - Barron's