Management also trimmed its outlook. IBM now expects full-year revenue growth of 4 to 5 percent in constant currency, down from the better-than-5-percent target it set in April, while holding to its forecast of $1 billion in additional free cash flow for the year.
The quarter was effectively pre-announced. On July 14, IBM took the unusual step of releasing selected preliminary figures alongside a letter from Krishna to investors, explaining what he called the software and infrastructure shortfall. Shares fell about 23 percent on the day. The drop marked the steepest one-day decline in the company’s history. Shares recovered roughly 4 percent in extended trading Wednesday, but remain down about 30 percent for the year against a gain of roughly 10 percent for the broad market.
In that letter, Krishna pointed to a late-June scramble among corporate buyers. He said IBM underestimated how sharply client capital spending shifted in the final weeks of the quarter, as customers moved money toward servers, storage and memory to lock in supply-constrained hardware ahead of expected price increases. That reordering hit demand for IBM Z systems and the transaction processing software attached to them. Krishna also cited cybersecurity incidents that pulled client attention away and pushed purchasing decisions back. Large deals, he added, simply did not close on schedule.
Chief Financial Officer James Kavanaugh put a number on the damage on Wednesday’s call. He said the mainframe stack alone cut more than five percentage points from growth, while Krishna argued the underlying demand has not disappeared — a majority of the miss, he said, was delayed capital spending by large clients, and roughly one-third of those deals had already closed in the third quarter.
That distinction is the crux of the argument now facing IBM: whether the revenue was postponed or lost outright. Several parts of the portfolio held up well. Red Hat growth accelerated to 11 percent, distributed infrastructure jumped 37 percent on Power and Storage demand, and the segment exited the quarter with about $500 million in backlog. The z17 mainframe program is still tracking at close to 130 percent of the comparable z16 cycle. Annual recurring software revenue rose 8 percent to $24.6 billion, with data revenue up 18 percent in constant currency and automation software up 3 percent.
The company is spending against the weakness rather than retrenching. IBM introduced Lightwell, a $5 billion commitment backed by more than 20,000 engineers aimed at open source software vulnerabilities, with general availability starting July 8 and early adopters including Bank of America, Goldman Sachs, JPMorganChase and Visa. On quantum computing, the company signed a letter of intent with the U.S. Department of Commerce to build a wafer foundry called Anderon, supported by $1 billion in CHIPS Act incentives and a matching $1 billion in IBM cash, part of a broader plan to invest more than $10 billion in quantum over five years. IBM also rolled out an internal AI coding tool called Bob, which it says more than 80,000 employees have adopted.
On the call, Krishna framed the problem as one of engagement rather than product. The spending environment stays fluid, he said, and the company must keep changing how it approaches clients — while insisting the transformation of the past five years left the fundamentals intact. His letter struck the same note, saying IBM has conviction in the strength of its portfolio.
For the mid-market firms that make up much of the enterprise technology buyer base, the signal is worth reading. A vendor of IBM’s size just told the market that its own sales habits lagged behind how customers actually spend — and that fixing habits takes longer than fixing products.
JBizNews Desk | New York
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