IBM (IBM.US)'s initial performance fell short of expectations, and its stock price fell sharply by 24%, and several Wall Street institutions lowered profit expectations

The Zhitong Finance App learned that IBM (IBM.US) announced preliminary results for the second quarter on Tuesday. As both revenue and profit fell short of market expectations, the company's stock price plummeted by about 24% in the intraday period. CEO Arvind Krishna admits that the quarter's results were “disappointing”, mainly because many large-scale transactions were not completed as planned, while customer capital expenditure was shifting to infrastructure such as servers, storage, and memory chips, which dragged down IBM's software and infrastructure business performance.

According to preliminary results, IBM's second-quarter revenue was US$17.2 billion, up 1% year over year, below market expectations of US$17.85 billion; adjusted earnings per share (EPS) are expected to be US$2.93, which is also lower than market expectations of US$3.02.

In an open letter to investors, Krishna said that the company failed to adapt to market changes in a timely manner at the implementation level, and many large-scale projects were unable to complete contracts as expected, which was the main reason why the performance fell short of expectations. “The current market environment requires teams to execute efficiently, and we didn't do that this quarter. We weren't able to adjust our strategy quickly enough, and many large deals didn't complete as planned, causing much of the gap in this quarter's results.”

By business, IBM's consulting business revenue was basically flat, with a 1% year-on-year increase based on a fixed exchange rate; infrastructure business revenue declined 7% year over year.

Krishna said that in April of this year, the company expected that the infrastructure business would only experience a low single-digit decline throughout the year due to the high base effect brought about by the launch of the next-generation mainframe z17. However, the actual situation was significantly weaker than expected. Among them, the weak performance of mainframes and their supporting software, especially the transaction processing business, was a major drag.

Furthermore, Krishna pointed out that in the last few weeks at the end of June, the company discovered that customers were reallocating quarterly capital expenses to relatively tight infrastructure products such as servers, storage devices, and memory chips to lock in supply just before prices rose. This change disrupted customers' original procurement plans, causing demand for IBM-related products to be impacted.

At the same time, he said that the company originally expected supply chain factors to have a certain impact, but did not anticipate such a large amount of redistribution of customer capital expenses. In addition, the increasing cybersecurity issues in the industry have also lengthened the procurement decision cycle of enterprises.

Despite falling short of expectations in the second quarter, Krishna emphasized that the company maintains confidence in its product portfolio and strategic transformation, and plans to introduce new reforms to speed up implementation of existing strategies to improve future business performance. IBM will hold an official results conference call on July 22 and announce the full year results outlook.

Notably, the internal performance of IBM's software business is fragmented. The company said that Red Hat's revenue growth rate has further accelerated to 11%, and businesses such as HashiCorp and Confluent, which have recently completed acquisitions, are also showing strong performance.

In terms of profit margin, IBM's initial gross margin for the second quarter was 57.7%, down 100 basis points year on year; adjusted gross margin was 59.4%, down 70 basis points year on year. Up to now, the company's cash flow from operating activities during the year was US$7.8 billion, and free cash flow (FCF) reached US$4.8 billion.

After the results were announced, a number of Wall Street institutions lowered IBM's profit expectations.

Citi said that this performance warning is rare. The delay in large-scale transactions and the transfer of customer capital expenses to servers, storage devices and memory chips have not only dragged down the mainframe business, but also reduced software expenses, especially transaction processing business. Citi believes this may further reinforce market concerns about IBM becoming an “AI laggard.” However, the bank still maintains IBM's “buy” rating and a target price of $375.

Bank of America also maintained a “buy” rating, but lowered its target price from $330 to $280. Analysts believe that both the software and infrastructure business are significantly weaker than expected, and IBM is expected to lower its annual performance guidelines. In particular, the software business growth will be significantly lower than the previous double-digit growth target.

HSBC downgraded IBM's rating from “holding” to “reducing holdings,” and the target price was lowered from 231 US dollars to 191 US dollars. HSBC believes that compared to peers such as SAP (SAP.US) and Accenture (ACN.US), IBM's future growth is relatively less sustainable, and the quantum computing field is also facing increasingly intense challenges from competitors such as IonQ (IONQ.US).