'Foolish not to prepare for potential downturn in Europe' - IBM CEO

Arvind Krishna says that 'caution is starting to creep into conversations' despite Big Blue seeing double-digit growth in the region

IBM's CEO has warned it would be "foolish" to not prepare for a potential downturn in Europe as inflation bites.

Arvind Krishna said that "caution is starting to creep into conversations" despite Big Blue seeing double-digit growth in the region.

His comments came as IBM announced its third-quarter 2022 earnings, in which the business also recorded double-digit growth in America and Asia.

What did IBM say about Europe?

Speaking on an earnings call transcribed by the Motley Fool, Krishna said Big Blue "shouldn't put our head in the sand" in Europe despite positive results.

"We see pretty strong demand and we saw double-digit growth in Europe," he said.

"I think that with the mixture of energy and inflation, you can sense that there is some caution creeping into the conversations, albeit not in the data and not yet in what we are doing as business there.

"But we'd be foolish not to prepare that there could be a bit of a downturn in Europe only.

"If I get to Europe, Western Europe, ballpark 20 per cent of global GDP. Even if you have a massive impact, five per cent to 10 per cent, that's a one per cent to two per cent impact on a global level all-in. Technology is typically two per cent to four per cent ahead of GDP growth."

Krishna also recently agreed at the 2022 Xchange Best of Breed Conference that partners should react to inflation by raising their prices.

"So if you're getting … an eight [per cent] to nine percent increase in your labour rate, there isn't that much margin. If you have 40 per cent margin, OK, maybe you can live with it. … But if not, you've got to pass it on. Now the question is, how much do you pass on and in what time? … So maybe you pass six per cent of it on and then see what's going to happen," he said.

How did IBM perform in its Q3 results?

Across the entire business, IBM hauled in revenue of $14.1bn in Q3, up six per cent year on year.

Infrastructure revenue grew 15 per cent, software revenue increased by seven per cent as consulting revenue went up five per cent.

Following these results, IBM expects constant currency revenue growth above its mid-single digit model.

Krishna said: "IBM delivered strong revenue growth in the quarter, reflecting our continued focus on the execution of our strategy. Globally, clients view technology as an opportunity to enhance their business, which is evident in the results across our portfolio."

Separately, IBM said hybrid cloud revenue over the last 12 months hit $22.2bn.

Krishna added: "In line with our hybrid cloud and AI strategy, we have continued to focus our portfolio; invest in our offerings, technical talent, and ecosystem; and streamline our go-to-market model."