Company blames customer shifts in capex spending, due in part to supply chain constraints and slower-than-expected mainframe and related software sales, for the anticipated shortfall.
IBM’s stock price plunged more than 25 percent Tuesday morning after the company issued a warning that its second quarter financial results will be weaker than expected.
In a letter to investors IBM Chairman and CEO Arvind Krishna said that an unexpected slowdown in mainframe Z and related software revenue led to an expected 7 percent decline in the company’s infrastructure revenue for the quarter.
The IBM news, which Krishna called “disappointing,” impacted other stocks across the IT industry, especially among software and consulting companies such as ServiceNow and Salesforce, according to a Seeking Alpha report.
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In his letter Krishna noted that IBM, which completed the launch of its z17 mainframe during the quarter, had anticipated infrastructure revenue to decline by low-single digits this year, beginning this quarter.
“What played out was worse than our expectations, driven by a shortfall in our Z performance and the associated software stack, primarily in Transaction Processing,” the CEO said in his letter. “In the last few weeks of June, we saw clients shift their quarterly capex spend toward servers, storage, and memory purchases to secure supply-constrained infrastructure ahead of expected price increases.”
“This dynamic impacted client buying patterns,” Krishna said. “While we anticipated some supply chain related impact in our expectations, we did not anticipate the magnitude of the capex reprioritization. In addition, clients were distracted with rapidly evolving, industry-wide cybersecurity concerns in the quarter.”
“These conditions require our teams to execute perfectly, and this quarter we faltered. We did not adapt and move quickly enough, and numerous large deals failed to close on the timelines we expected, driving the majority of our shortfall.”
“These are not excuses, but they are realities. Our job is to help our clients through uncertainty, to find paths forward to grow their businesses no matter what is happening in the external environment,” Krishna said.
IBM now forecasts revenue of $17.2 billion for the second quarter ended June 30, up 1 percent year-over-year. Diluted earnings per share are expected to be $2.27, down 2 percent from one year earlier.
While the CEO said “our second-quarter results are disappointing,” he highlighted other areas of IBM’s business that showed strength during the quarter, “reinforcing the conviction we have in our portfolio and strategy.”
Software revenue is expected to report 5 percent growth for the quarter, including 11 percent quarter-to-quarter sequential growth in Red Hat revenue and “strong” performances from recent acquisitions HashiCorp and Confluent.
“With clients prioritizing infrastructure investments, Distributed Infrastructure had its best performance in reported history, up 37 percent with strong growth in Power and Storage, and a backlog of approximately $500 million exiting the quarter,” Krishna said in his letter.
As of 11:05 a.m. ET Tuesday IBM’s shares stood at $216.10, down 25.5 percent from its $290.23 Monday close.
IBM is scheduled to release its full second quarter numbers on Wednesday, July 22. Krishna said IBM is still working to close the financial reporting for the quarter and the final results “could be slightly different” from the numbers provided in his letter.
“While performance in the quarter was below our expectations, we have conviction in the strength of our portfolio and the strategic transformation of our business,” Krishna said, in the conclusion of his letter. “To remedy challenges this quarter, we are undertaking new initiatives and accelerating others, all to improve our results going forward.”
