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IBM shares fell sharply on Tuesday after the company released preliminary second-quarter results below Wall Street forecasts. The stock dropped more than 22% in premarket trading as investors reviewed the revenue and profit warning.
The company linked the shortfall to weaker software and infrastructure results. Clients redirected spending toward servers, storage, and memory chips used for artificial intelligence systems. IBM said several large contracts also missed expected closing dates.
IBM expects second-quarter revenue of $17.2 billion, up 1% from the same period last year. Analysts had expected about $17.86 billion, according to data compiled by LSEG. The company also expects adjusted earnings of $2.93 per share. Analysts had forecast about $3.02 per share.
Chief Executive Arvind Krishna said customer buying changed during the final weeks of June. Businesses moved quarterly capital spending toward hardware before expected price increases. They also sought equipment facing limited supply, including servers, storage systems, and memory products.
Krishna said IBM had expected some supply-chain pressure during the quarter. However, the company ‘did not anticipate the magnitude’ of the spending shift. He also said fast-changing cybersecurity concerns distracted clients and affected purchasing decisions.
IBM’s preliminary figures show software revenue increased 5% during the quarter. Consulting revenue stayed flat, while infrastructure revenue declined 7%. The company said weaker Z mainframe performance and related transaction-processing software contributed to the infrastructure shortfall.
Krishna said conditions required strong execution from IBM’s sales teams. He acknowledged that the company “faltered” and failed to adjust quickly enough. He added that “numerous large deals” did not close within the expected period.
Still, several business areas recorded growth. Red Hat revenue rose 11%, while recent acquisitions HashiCorp and Confluent delivered stronger results. Distributed infrastructure revenue increased 37%, supported by demand for Power systems and storage products.
IBM said the z17 mainframe program reached nearly 130% of the comparable z16 stage. It also reported a distributed infrastructure backlog of about $500 million at the quarter’s end.
IBM reported a GAAP gross profit margin of 57.7%, down one percentage point from a year earlier. Its adjusted gross margin reached 59.4%, down 0.7 percentage points. GAAP earnings reached $2.27 per share, while adjusted earnings rose 5% to $2.93.
IBM also reported a 14.4% GAAP pretax margin, down 0.9 percentage points. Its adjusted pretax margin rose 0.3 points to 19.2%. Through June, operating cash flow reached $7.8 billion. Free cash flow totaled $4.8 billion.
IBM’s warning pressured other software companies before Tuesday’s market open. Microsoft, ServiceNow, Salesforce, and Intuit fell between 3% and 5%. The iShares Expanded Tech-Software Sector ETF also dropped more than 4%.
IBM’s update described a wider change in corporate technology budgets. Clients directed more money toward data centers, chips, storage, and networking equipment. That left less quarterly spending available for traditional software purchases.
IBM plans to publish its complete second-quarter financial results on July 22. The company said its current figures are preliminary while it completes the quarter-end reporting process. Final numbers may differ slightly from the update.
IBM scheduled its earnings call for 5 p.m. Eastern Time on July 22. Management said it would provide more detail and discuss full-year expectations during that call.
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