IBM $IBM warned Tuesday that its second-quarter results fell short of expectations, with both revenue and earnings coming in below what analysts had anticipated and shares dropping as much as 18% before the opening bell.
The company projected second-quarter revenue of $17.2 billion, a 1% year-over-year increase, alongside adjusted earnings of $2.93 per share. Analyst expectations called for earnings of $3.01 per share, according to CNBC. Breaking those figures down by division, software gained 5%, consulting held steady, and infrastructure slid 7%, according to The Wall Street Journal.
CEO Arvind Krishna attributed the shortfall to clients redirecting capital spending toward hardware, including servers, storage, and memory purchases, at the expense of software and consulting budgets. "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," Krishna wrote in a letter to IBM investors. "While we anticipated some supply chain related impact in our expectations, we did not anticipate the magnitude of the capex reprioritization."
Krishna acknowledged that the company's response was inadequate. "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.
The preliminary results also showed GAAP earnings per share of roughly $2.27, representing a 2% year-over-year decline, while the pretax income margin came in at a projected 14.4%, shrinking by 90 basis points, according to The Journal.
Tuesday's warning comes as IBM has been making large bets on its technology businesses. The company announced plans to invest more than $10 billion in quantum computing over five years, targeting the delivery of a large-scale, fault-tolerant quantum computer by 2029. IBM CEO Arvind Krishna said at the time that "the quantum era is no longer ahead of us, it has started."
IBM also entered a partnership with OpenAI focused on AI-powered application security services for enterprise clients, with the offering built on IBM's consulting platform and tied to its $5 billion open-source software security initiative with Red Hat.
IBM stock had gained 21% over the prior three months through Monday's close, though it remained 2% in negative territory for the year heading into Tuesday's premarket session.