Headline: IBM shares plunge after preliminary Q2 revenue falls short of estimates despite surging AI bookings
Key Facts
- Preliminary Q2 revenue: ~$17 billion, up 1% YoY but well below analyst estimates of $18 billion.
- Shares fell as much as 17% in premarket trading, erasing gains from a 30% rally in May.
- Software revenue grew 5% (Red Hat +11%) but missed forecasts; consulting flat; infrastructure down 7%.
- CEO Arvind Krishna cited execution issues and tariff-related spending shifts as factors.
- Adjusted EPS ~$3.00 vs $3.00 consensus; gross margin 58% (down 1pp); pre-tax margin ~14%.
- Cumulative AI bookings surpassed $12 billion, highlighting strong enterprise AI demand.
IBM issued preliminary second-quarter results on Monday showing revenue of roughly $17 billion, up one percent year over year but well below the $18 billion that analysts had expected. The shortfall triggered a sharp sell-off, with shares falling as much as 17 percent in premarket trading, erasing weeks of gains that had been fuelled by bullish analyst coverage and a stock rally of 30 percent in May alone. CEO Arvind Krishna called the results disappointing in a letter to investors, acknowledging that the company had failed to deliver on expectations despite strong momentum in artificial intelligence.
The miss was broad across IBM's core segments. Software revenue rose five percent, with Red Hat up 11 percent, but both fell short of forecasts. Consulting revenue remained essentially flat, while infrastructure revenue dropped seven percent as clients pulled back on mainframe and storage purchases. Krishna blamed execution issues, noting that several large deals failed to close in the final weeks of the quarter. He also said some clients shifted capital spending toward servers, storage, and memory in late June ahead of expected tariff-related price increases, a dynamic that disrupted the usual end-of-quarter pipeline.
Adjusted earnings per share came in at nearly three dollars, also below the roughly three dollar consensus. Gross profit margin fell to just under 58 percent, down about one percentage point from a year earlier, while pre-tax margin slipped to just over 14 percent. The combination of weaker revenue and narrower margins drove the sharp sell-off, leaving investors questioning whether IBM's long-awaited turnaround is stalling.
The one bright spot was artificial intelligence. IBM said cumulative AI bookings have now surpassed $12 billion, suggesting sustained enterprise demand for AI consulting and infrastructure even as the broader business stumbled. The company has been investing heavily in AI partnerships, including a recent tie-up with OpenAI on enterprise cybersecurity, and Krishna has framed AI as the growth engine that will eventually reshape the company's revenue mix. This AI backlog includes deals for consulting services, software subscriptions, and hardware optimized for AI workloads, such as IBM's watsonx platform and hybrid cloud offerings.
However, the preliminary results raise questions about whether that AI momentum can offset weakness in IBM's legacy businesses quickly enough. The infrastructure decline and consulting stagnation are familiar problems for the company, and the execution issues Krishna cited suggest internal challenges beyond macroeconomic headwinds. IBM has been in the midst of a multi-year transformation under Krishna, who took over as CEO in 2020 with a mandate to streamline the company and pivot toward high-growth areas like cloud and AI. He spun off the managed infrastructure unit Kyndryl in 2021 and acquired Red Hat in 2019 for $34 billion to strengthen hybrid cloud capabilities. Despite these moves, the company has struggled to sustain consistent revenue growth, with quarterly results often swinging between beats and misses.
In the context of the broader tech sector, IBM's performance stands in contrast to hyperscalers like Microsoft and Google, which have seen robust cloud and AI revenue. But IBM's client base—largely large enterprises and government agencies—tends to be more conservative and slower to adopt new technologies, particularly when it comes to mission-critical mainframe migration. The infrastructure segment's 7% drop reflects a cyclical downturn in mainframe upgrades, as customers delay purchases amid economic uncertainty and high interest rates. Similarly, consulting revenue stagnation indicates that companies are taking a cautious approach to large transformation projects, despite ongoing demand for AI strategy and implementation.
Analysts had grown increasingly bullish on IBM in the months leading up to the pre-announcement, with several upgrading the stock based on the promise of AI bookings. The 30% rally in May alone was fueled by optimism that IBM would finally deliver the growth acceleration Krishna had promised. Monday's plunge wiped out those gains, underscoring the volatile nature of the stock. Some analysts now expect IBM to provide more cautious guidance when it releases full second-quarter results later this month, as the execution issues may persist into the second half of the year.
Historically, IBM has been a bellwether for enterprise IT spending, and the preliminary quarterly miss could signal broader headwinds for legacy enterprise vendors. The company's exposure to mainframes, storage, and consulting makes it sensitive to shifts in corporate budgets, particularly as clients prioritize AI investments over traditional hardware upgrades. The tariff-related pull-forward of spending mentioned by Krishna adds another layer of complexity, as IBM now faces a potential demand lull in the third quarter after customers accelerated purchases in June.
Looking ahead, IBM's ability to convert its $12 billion AI backlog into recognized revenue will be critical. While the backlog demonstrates strong interest, the company must execute on delivery and win additional deals to maintain momentum. Krishna has emphasized the importance of watsonx, its suite of AI tools for enterprises, and partnerships with major players like OpenAI, Hugging Face, and others to offer specialized AI solutions. The company is also investing in industry-specific AI models for sectors like healthcare, financial services, and retail, hoping to differentiate from competitors that focus on general-purpose AI.
The road ahead remains challenging. IBM continues to face stiff competition from cloud giants Amazon Web Services, Microsoft Azure, and Google Cloud, all of which offer AI services alongside vast computing infrastructure. However, IBM's strength in regulated industries—where data sovereignty and compliance are paramount—could give it an edge. The company's focus on hybrid cloud and on-premise AI deployments appeals to clients that are not ready to move all workloads to public cloud. This niche, combined with its consulting expertise, may help IBM stabilize its revenue over the long term, but the immediate pain from the Q2 miss will likely weigh on the stock until the company demonstrates consistent execution.
For investors who had bought into the thesis that IBM was finally turning a corner, the preliminary numbers are a reminder that the transition from legacy enterprise computing to an AI-driven business remains uneven. The stock had been one of the best performers in the technology sector this year before Monday's drop. With full results due later this month, all eyes will be on Krishna's guidance and any signs that the execution issues are being resolved. Until then, the market's disappointment reflects the gap between AI hype and the reality of transforming a century-old technology giant.