IBM’s second-quarter earnings are expected to miss expectations, with the company’s infrastructure and software business affected by component cost increases and cybersecurity concerns. IBM CEO Arvind Krishna promised “new initiatives” and accelerated initiatives to remedy its challenges, with more details expected on the July 22 earnings call.
Krishna’s warning eight days before IBM’s official quarterly earnings date sent its stock down 26 percent as of Wednesday afternoon Eastern time, a steeper decline than what IBM experienced since at least 1968.
IBM’s teams did not execute “perfectly,” adapt and move quickly enough, and multiple large deals failed to close on expected timelines, contributing to the company’s shortcomings in the quarter. Krishna acknowledged that customers have been reworking IT budgets around soaring component costs and fast-moving cybersecurity concerns.
Chris Bogan, vice president of sales at Houston-based IBM solution provider Mark III Systems, said that the majority of his company’s IBM business is hardware and he still expects “a banner year.” Bogan noted that mainframes, Power systems, and other infrastructure are essential to many businesses, saying “those mainframes, the Power systems, all of that—the entire world runs on them for a reason.”
IBM said to expect $17.2 billion in revenue for the quarter, whereas Wall Street expected closer to $17.9 billion. The company’s gross profit is expected to be $9.91 billion, down less than 1 percent year on year.
Clients moved spending to servers, storage, and memory to get ahead of price increases and supply chain constraints. IBM already expected a low-single-digit decline year on year in its infrastructure business during the quarter, but in the last few weeks of June, customers shifted spending to other areas, resulting in “worse than our expectations” results for Z, transaction processing software, and other associated software.
Infrastructure was expected to fall in the low single digits year on year during the quarter, but it is now headed to a 7 percent decline. The hit to transaction processing software dragged down an otherwise strong IBM software portfolio. Wall Street was expecting double-digit growth in IBM software overall, but the vendor now signals just a 5 percent increase year on year.
Related: Delta 8 Disposables vs. Delta 8 Cartridges: Which One to Choose?
Krishna also partly blamed IBM’s shortcomings in the quarter on clients “distracted with rapidly-evolving, industry-wide cybersecurity concerns in the quarter,” an apparent reference to Anthropic’s Mythos model that promises to upend existing vulnerability management practices. Concerns over the security implications of Anthropic’s Claude Mythos 5 and Fable 5 reached the point that the U.S. applied export controls to the models.
Anthropic redeployed and restored access to the models on July 1, according to the vendor. The IBM CEO goes on to highlight IBM and its Red Hat division answering Mythos with Lightwell, a $5 billion commitment with new frontier AI capabilities and 20,000-plus engineers addressing open-source software vulnerabilities.
IBM’s underperformance appeared to contribute to a stock rally for cybersecurity vendors, with Crowdstrike’s stock up about 11 percent as of Wednesday afternoon. Zscaler was up about 6 percent, Palo Alto Networks was up about 8 percent, and Fortinet increased about 4 percent.
For IBM, the current challenges may be an opportunity to refocus on its strengths, such as its mainframe business and its investments in AI and quantum computing. The company has been investing heavily in a position as the best quantum computing vendor, with plans to invest more than $10 billion in quantum research and development over the next five years.
It will be important to watch how IBM addresses its execution issues and adapts to the changing cost-cutting environment. With its strong portfolio of products and services, including Red Hat, IBM is well-positioned to capitalize on emerging opportunities in areas like AI, quantum computing, and cybersecurity.
IBM executives should have more details on July 22 around what went wrong in infrastructure spending despite the strong start to the z17 cycle and how the vendor will fix execution. The new z17 has more than doubled program to program, ahead of its predecessor the z16, with clients representing 85 percent of installed million instructions per second maintaining or even growing their MIPS.
