TL;DR
IBM lowered its revenue growth forecast by four to five percent after sales of the Z mainframe system fell 42 percent in the second quarter.
IBM cut its full-year sales outlook on Wednesday after reporting a sharp drop in demand for its mainframe business, reducing its revenue growth target to four to five percent from a previous forecast of more than five percent. The company also cut guidance for its software unit, Chief Financial Officer Jim Kavanaugh said. Bloomberg that annual software sales will now grow by six to eight percent. Kavanaugh said the reduction is entirely tied to weakness in IBM’s infrastructure unit and its associated software, and that the rest of the company is performing extremely well.
Mainframe sales plunged 42 percent in the second quarter ended June 30, reversing a streak of strong growth since IBM launched its newest Z systems last year. The company had already signaled the weakness on July 14 when it released preliminary results that sent shares tumbling 25 percent in a single day, the worst drop in IBM’s history. Shares were up about three percent in extended trading Wednesday after the full earnings, suggesting investors had largely priced in the damage.
IBM has spent tens of billions of dollars to transform itself into a high-growth software company through acquisitions of Red Hat, HashiCorp and Confluent, and has been moving towards AI-powered enterprise security together with OpenAI. But the shift toward software has made it a target for investors who fear that artificial intelligence tools will disrupt the business models IBM recently acquired. Kavanaugh rejected that concern, arguing that most of IBM’s software sits close to enterprise infrastructure and data, making it much harder to replace than applications most vulnerable to AI disruption.
The company said it will accelerate cost-savings initiatives and continues to expect an additional $1 billion in free cash flow this year by reducing spending on third-party technology, tightening supply chain management and reducing administrative costs. The roster should remain largely stable throughout the year, Kavanaugh said. Total revenue for the quarter grew about one percent to about $17 billion, with adjusted earnings of nearly $3 per share.
The question of AI disruption arose in concrete form earlier this month when Bloomberg reported that Starbucks was looking to replace software from IBM and other vendors with tools built in-house. Kavanaugh acknowledged that Starbucks spends about $2 million a year with IBM on an app that he says is “ideal for being interrupted by AI.But he argued that most of IBM’s enterprise software sits much closer to the infrastructure layer, where replacement is much more difficult, and that the company has been investing to maintain its mainframe platform relevant in the AI era through partnership with Arm to run modern workloads on your Z systems.
