IBM surprised investors Tuesday with an early warning that its second-quarter results will come in below expectations, sending the company’s stock plummeting roughly 25% and dragging other software and consulting names lower.
For partners, this offers yet another data point about how enterprise customers make purchasing decisions in today’s market.
Customers redirect spending toward scarce infrastructure
IBM says customers didn’t suddenly stop spending; they just spent differently.
The company now expects second-quarter revenue of $17.2 billion, up 1% year over year but below analyst expectations. Infrastructure revenue is expected to fall 7%, while software revenue is still projected to grow 5%. Consulting revenue was essentially flat.
CEO Arvind Krishna said IBM expected some slowdown after the launch of its z17 mainframe, but not what actually happened.
“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,” said Krishna in a letter to IBM Investors. “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.”
IBM also said customers were distracted by “rapidly evolving, industry-wide cybersecurity concerns,” contributing to delayed purchasing decisions.
Delayed deals expose execution problems at IBM
Krishna didn’t place all the blame on market conditions, but he did acknowledge IBM missed opportunities to respond.
“These conditions require our teams to execute perfectly, and this quarter we faltered,” he stated. “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.”
That level of candor is unusual for an earnings warning. Investors clearly didn’t like what they heard.
The selloff quickly spread beyond IBM.
According to Seeking Alpha, shares of ServiceNow, Salesforce, Adobe, Workday, Microsoft, and several consulting firms all fell after the announcement as investors questioned whether IBM was seeing an isolated problem or an early sign that enterprise technology spending is being kicked around.
Red Hat, Power systems, and storage remain strong
Despite the warning, though, IBM pointed to several parts of the business that continued to perform well.
Red Hat revenue grew 11% sequentially during the quarter, while recent acquisitions HashiCorp and Confluent posted strong results.
IBM also said its Distributed Infrastructure business delivered its best reported quarter ever, growing 37% with strong demand for Power systems and storage. The company came out of the quarter with roughly $500 million in backlog for that business.
What IBM’s warning means for channel partners
These results all paint a more nuanced picture than the stock reaction suggests: enterprise customers are still investing; they’re just prioritizing the infrastructure they believe they need most right now (even if that means delaying other purchases).
IBM is set to release its full second-quarter earnings on July 22, when investors will get a clearer picture of whether this was simply a choppy quarter or the start of a longer-term pattern.
Even with the disappointing quarter, IBM said recent acquisitions like HashiCorp continued to perform well. It’s another sign the company is still solid on hybrid cloud and infrastructure management, even as customers change how and where they’re spending their IT dollars. Read more here.