[BENGALURU] IBM beat Wall Street estimates for second-quarter revenue and profit on Wednesday (Jul 23), but lower-than-expected sales in its mainstay software segment overshadowed a renewal in demand for the mainframe business spurred by artificial intelligence (AI) upgrades.
IBM’s shares fell 5 per cent in extended trading, after a nearly 30 per cent rise this year driven by investors betting on prioritised software spending as businesses navigated macroeconomic uncertainty and ongoing trade negotiations.
“You are seeing the stock pull back, because there’s just not a lot of room to miss,” said Dan Morgan, senior portfolio manager at Synovus Trust, which holds shares in IBM.
“This would be more evidence that software is not growing at the pace that the Street was expecting.”
IBM’s software segment, which has traditionally been a bright spot, reported sales of US$7.39 billion, missing analysts’ average estimate of US$7.41 billion, according to data compiled by LSEG.
Customers funnelled investment towards IBM’s latest AI-specialised mainframes, diverting revenue from transaction processing, which primarily accounts for software run on the mainframe, finance chief Jim Kavanaugh said.
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Transaction processing sales, which were mostly flat in the quarter, are housed in the software unit, dragging the segment’s performance.
The infrastructure segment, which houses its mainframe, reported revenue of US$4.14 billion, beating estimates of US$3.81 billion.
The Big Blue reported revenue of US$16.98 billion for the June quarter, beating estimates of US$16.59 billion. Adjusted earnings of US$2.80 per share also beat estimates.
Consulting sales grew 3 per cent, ending five consecutive quarters of revenue declines, as businesses seek expertise on integrating AI products.
However, given the “current demand environment”, IBM is “prudently cautious” on how much the consulting segment might contribute to further growth this year, Kavanaugh said during a post-earnings call.
Its “AI book of business”, which combines bookings and actual sales, grew to US$7.5 billion, up US$1.5 billion from the previous quarter.
IBM did not provide a forecast for the third quarter, after it broke tradition in April and issued a one-off quarterly outlook to give investors more clarity at a time when US President Donald Trump’s global tariffs were first going into effect. REUTERS