NEW YORK: International Business Machines Corp (IBM) shares slides the most in at least 58 years after the company reports preliminary second-quarter (2Q) sales that fall short of expectations, attributing the miss to customers shifting their spending to chips and servers amid artificial intelligence (AI)-fuelled shortages.
Preliminary 2Q revenue totalled US$17.2bil, IBM said in a statement, below analysts’ estimates of US$17.9bil.
Sales from IBM’s infrastructure division, which includes mainframe computers, were especially hard hit, dropping 7%. The company said it’s still reviewing its books and final results, set to post next week, may be slightly different.
The shares plunged 25% to US$217.07, the biggest single-day loss since at least Jan 3, 1968, the earliest date for which Bloomberg has pricing data on the stock.
IBM’s announcement initially weighed on other software companies, with stocks including ServiceNow Inc and Workday Inc slipping before making up some of the loss later in the trading day.
An unprecedented, global build-out of data centres (DC) key to powering AI systems has brought about severe shortages of semiconductors, particularly memory chips.
The supply squeeze has raised costs for manufacturers of everything from iPads to Xbox consoles.
And IBM’s results show it’s also forcing companies to shift their spending toward servers and chips, leaving less money for other technology such as IBM’s mainframes and software.
“Discretionary IT spending is worsening and will likely be the main theme across most software companies when they report results,” Bloomberg Intelligence analyst Anurag Rana said in a note.
The chief executive officer of IBM, Arvind Krishna, said that the company had expected supply-chain issues to depress results. But he said the company failed to predict that its customers would also end up shifting their spending away from IBM’s products to servers, storage and memory purchases to hedge against further price increases.
“What played out was worse than our expectations,” Krishna said in a letter to investors, adding that the company’s Z mainframes and associated software accounted for much of the shortfall.
“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,” he said.
The blow to IBM’s hardware sales threatens to stymie its efforts to refashion itself into a high-growth software company through major acquisitions of Red Hat, HashiCorp and Confluent.
Even the company’s new focus has made it a target for investors concerned that AI products will replace many current software products.
In February, IBM saw a steep selloff after AI startup Anthropic PBC unveiled a tool that may help modernise a dated programming language that runs on IBM mainframes.
The company also reported a 2% preliminary decline in diluted earnings to US$2.27 a share.
IBM, like most software providers, has integrated AI into its products and touted its ability to provide customers with the latest technology. The company has tried to convince investors that AI will strengthen its business, not replace it.
Executives have said AI-related work increases demand for IBM’s infrastructure software, which lets clients work with leading AI models.
Krishna said customers were also “distracted” by “rapidly evolving” cybersecurity concerns. Anthropic’s Mythos model alarmed governments and corporations around the world earlier this year with its ability to unearth vulnerabilities that could be exploited by bad actors.
Banks, technology companies and other institutions were given early access to the model in an effort to shore up defences before Mythos was more widely released.
During the 1Q, which ended March 31, IBM’s infrastructure business had generated revenue that rose 15% to US$3.33bil, outperforming analysts’ estimates.
In his letter, Krishna described the sales of the Z17 line of mainframes, which began last year, as “the strongest start to a mainframe programme in our history” and said the company had expected revenue from the division to decline in the low-single digits for the year.
IBM’s miss was largely tied to the mainframe business, and interpreting it as a sign of weakness for the entire software sector is “a bit of a stretch”, said Kirk Materne, an analyst at Evercore ISI.
The results instead stand to perpetuate “AI-loser” fears around IBM, compounded by a Bloomberg report last week about Starbucks Corp potentially replacing some IBM software, Citigroup analyst Mark Zhang said.
“While it’s fair to say that this kind of increased spending is impacting more broader tech”, the IBM results were “a little more specific”, said Susquehanna analyst Jamie Friedman.
He added that it’s worth watching Accenture Plc, Cognizant Technology Solutions Corp and other similar companies for enterprise spending shifts. — Bloomberg
