International Business Machines Corp. (NYSE:IBM) on Tuesday released preliminary second-quarter results that fell short of its expectations, citing weaker-than-anticipated mainframe-related sales as customers shifted spending toward supply-constrained servers, storage, and memory infrastructure.
Following the announcement, the stock fell nearly 23%.
IBM Misses Expectations
The company said it expects second-quarter revenue of $17.2 billion, up 1% from a year earlier but below the Wall Street consensus estimate of $17.86 billion.
Software revenue increased 5%, Consulting revenue was flat, or up 1% at constant currency, while Infrastructure revenue declined 7%.
IBM expects diluted GAAP earnings per share of $2.27, down 2% from a year earlier. Operating (non-GAAP) EPS is projected at $2.93, up 5% year over year but below the Wall Street consensus estimate of $3.02.
IBM said its second-quarter GAAP gross profit margin narrowed 100 basis points to 57.7%, while the non-GAAP operating gross margin declined 70 basis points to 59.4%.
For the first half of the year, operating cash flow totaled $7.8 billion, while free cash flow reached $4.8 billion.
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Enterprise Customers Shifted Spending
Chairman and Chief Executive Officer Arvind Krishna said the company’s performance suffered after enterprise customers redirected capital spending late in the quarter toward servers, storage and memory products to secure supply amid expected price increases.
That shift hurt demand for IBM’s Z mainframe platform and related transaction-processing software, leading to several large deals missing their expected closing dates.
Krishna also cited rapidly evolving cybersecurity concerns as another factor that disrupted customer purchasing decisions during the quarter. He said IBM’s teams “did not adapt and move quickly enough” to changing market conditions.
Despite the weaker quarter, IBM highlighted several areas of strength. Red Hat revenue growth accelerated to 11%, recent acquisitions including HashiCorp and Confluent delivered strong results, and Distributed Infrastructure revenue rose 37%, marking its best reported performance. The company also said Consulting signings continued to grow, supported by generative AI demand.
IBM reiterated its long-term strategy, highlighting the recent launch of its Lightwell AI security platform and plans to invest more than $10 billion in quantum computing over the next five years. The company said it remains on track to deliver a large-scale fault-tolerant quantum computer by 2029.
IBM said it will report its full second-quarter results and discuss its outlook during its scheduled earnings call on July 22.
IBM Price Action: IBM shares were down 22.56% at $224.76 during premarket trading on Tuesday, according to Benzinga Pro data.
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