IBM Stock Tanks To 2-Month Lows In Pre-Market – CEO Says Company ‘Faltered’ In Q2 As ‘Large Deals Failed To Close’ On Expected Timelines

• CEO Arvind Krishna said clients redirected capital spending toward servers, storage, and memory purchases late in the quarter, hurting demand for IBM's mainframe products.
• Krishna also stated that cybersecurity concerns and execution issues delayed several large customer deals that were expected to close during the quarter.
• According to the CEO, the reasons cited are not “excuses” but “realities.”

IBM (IBM) shares tumbled and were on track to hit a near two-month low in pre-market trade on Tuesday after the company released preliminary second-quarter results showing a sharp shortfall in its mainframe and software business, and guidance lower than Wall Street expectations. 

CEO Arvind Krishna stated that the company had “faltered” in the second quarter. “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,” said Krishna. 

IBM reported preliminary revenue of $17.2 billion in the second quarter (Q2), up 1% year-over-year, but lower than the expected $17.8 billion. The company also stated that earnings per share (EPS) would be around $2.27, while Wall Street had anticipated $3.02. 

While software revenue rose 5% in the preliminary report, and consulting was roughly flat, infrastructure revenue fell 7%, driven by a shortfall in the company's Z mainframe line and its associated Transaction Processing software. 

IBM’s stock plummeted as much as 23% in pre-market trade, on track to hit lows last seen in mid-May. It was among the top trending tickers on Stocktwits. Retail sentiment around the company on the platform shifted to ‘bullish’ from ‘neutral’ territory over the past day, and chatter increased to ‘high’ from ‘normal’ levels. 

IBM CEO Cites ‘Realities,’ Not ‘Excuses’

Krishna said in a statement that IBM had expected infrastructure revenue to decline by low-single digits this quarter as it wrapped up the z17 mainframe launch cycle, which he described as the strongest start to a mainframe program in company history. Instead, the decline came in worse than planned.

"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," said Krishna. He added that IBM had anticipated some supply chain impact but "did not anticipate the magnitude of the capex reprioritization." 

He also pointed to industry-wide cybersecurity concerns during the quarter as a distraction that pulled clients’ attention away from purchasing decisions. “These are not excuses, but they are realities. Our job is to help our clients through uncertainty, to find paths forward to grow their businesses, no matter what is happening in the external environment,” Krishna said.

The IBM CEO also pointed out that despite the softness in infrastructure revenue, z17 remains nearly 130% ahead of its prior program-to-program pace, outperforming z16, IBM's previous strongest mainframe cycle.

“These conditions require our teams to execute perfectly, and this quarter we faltered.” 
– Arvind Krishna, CEO, IBM

Wall Street Split On IBM Outlook

On Tuesday morning, Morgan Stanley raised its price target on IBM to $293 from $267 and maintained an ‘Equalweight’ rating after the news. However, HSBC moved in the opposite direction, downgrading the stock to 'Reduce' from 'Hold' and cutting its price target to $191.

In its note, HSBC said that investors can buy shares of IonQ (IONQ), SAP (SAP), 0.16 Accenture (ACN), and HP (HPQ) for around the same value and create a "synthetic IBM" to replicate IBM's subsector exposure in software, consulting, hardware, and quantum computing. It noted that a "synthetic IBM" could offer better medium-term earnings power for the same upfront spend.

Meanwhile, Oppenheimer also raised its price target to $350 from $320 and kept an ‘Outperform’ rating. It stated that IBM is expected to report in-line Q2 results and raise full-year revenue guidance, supported by stable contract trends, strong renewals, steady software demand, and continued strength in non-mainframe infrastructure.

Retail investors on Stocktwits debated over whether the drop in IBM’s stock price was an overreaction in pre-market trade, or whether it's slated to drop even further after market open. 

IBM’s stock has fallen over 2% this year.

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