The TL;DR
IBM cut its revenue growth forecast to four to five percent after sales of its Z mainframe system fell 42 percent in the second quarter.
IBM lowered its full-year sales outlook on Wednesday after reporting a sharp drop in demand for its core business, lowering its revenue growth rate to four to five percent from an earlier forecast of more than five percent. The company also adjusted the direction of the software unit, with CFO Jim Kavanaugh telling Bloomberg that annual software sales will now grow by six to eight percent. Kavanaugh said the decline is entirely tied to the weakness of IBM’s infrastructure and related software division, and that the rest of the company is operating very well.
Mainframe sales fell 42 percent in the second quarter ended June 30, reversing strong growth since IBM introduced its new Z systems last year. The company had already signaled weakness on July 14 when it released preliminary results that sent the stock down 25 percent in one day, the worst decline in IBM’s history. Shares rose nearly 3 percent in extended trading Wednesday after the full report, suggesting investors are pricing in losses.
IBM has spent tens of billions of dollars reinventing itself as a high-growth software company with the acquisitions of Red Hat, HashiCorp, and Confluent, and has been pushing into AI-powered enterprise security with OpenAI. But the software-first pivot has made it a target for investors who worry that AI tools will disrupt the business models IBM recently bought into. Kavanaugh pushed back on those concerns, saying that much of IBM’s software sits close to business infrastructure and data, making it more difficult to restore than applications most vulnerable to AI disruption.
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The company said it will accelerate cost-saving initiatives and continues to expect an additional $1 billion in free cash flow this year by reducing spending on third-party technology, strengthening supply chain management, and reducing administrative costs. The headcount should remain low throughout the year, Kavanaugh said. Net income for the quarter grew about 1 percent to about $17 billion, with adjusted earnings coming in at about $3 per share.
The question of AI disruption emerged in concrete form earlier this month when Bloomberg reported that Starbucks is looking to replace software from IBM and other vendors with built-in tools. Kavanaugh acknowledged that Starbucks spends about $2 million a year on IBM in a request that he admitted “start to get distracted by the AI.” But he argued that most of IBM’s business software resides very close to the infrastructure layer, where change is most difficult, and that the company was investing in keeping its mainframe platform fit for the AI era by partnering with Arm to run modern operations on its Z systems.
