IBM has warned investors that its upcoming second quarter results will disappoint.
In an open letter to investors, IBM chairman, president and CEO Arvind Krishna wrote revenue is expected to be $17,2-billion, up 1%, with software revenue up 5%, consulting revenue flat at a 1% increase at constant currency and infrastructure revenue down 7%.
The gross profit margin and pre-tax income margin and earnings per share will all be down.
“I want to spend some time explaining what we experienced in the quarter that led to the Software and Infrastructure performance shortfall you see,” he wrote.
“When we discussed our expectations with you in April, we noted that we would be wrapping on the launch of z17 in the second quarter. Given this was the strongest start to a mainframe program in our history, we expected Infrastructure revenue to decline low-single digits for the year, beginning this quarter.
“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.
“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. This dynamic impacted client buying patterns.
“While we anticipated some supply chain related impact in our expectations, we did not anticipate the magnitude of the capex reprioritisation. In addition, clients were distracted with rapidly-evolving, industry-wide cybersecurity concerns in the quarter.
“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, driving the majority of our shortfall.”
He added that there were some pockets of strength, including Red Hat revenue growth of 11%, strong returns from the acquisitions HashiCorp and Confluent, good performance from Distributed Infrastructure, growth from z17, growth in Consulting signings from GenAI, and margin expansion thanks to productivity initiatives.
“Importantly, we continue to innovate at speed and scale. After the introduction of Mythos, our teams across IBM and Red Hat quickly mobilised to take advantage of an unprecedented opportunity, launching Lightwell.
“Lightwell is a $5-billion commitment backed by new frontier AI capabilities and a global force of more than 20,000 engineers creating a trusted enterprise clearinghouse to address open source software vulnerabilities.”
Krishna concludes that IBM continues to invest in quantum computing, and is seeing positive moves in that area.
“Recently, with the US Department of Commerce, we announced a letter of intent to build Anderon, the world’s first pure-play quantum wafer foundry supported by $1-billion in CHIPS incentives provided by the DoC and a $1-billion cash contribution by IBM.
“Shortly after that, we disclosed plans to invest more than $10-billion in quantum over the next five years, spanning R&D, capex, manufacturing scaling, M&A and ecosystem expansion. We remain on track to deliver the first large-scale fault-tolerant quantum computer by 2029.”