IBM shares fall 23%: CEO says Q2 earnings fell short as customers spent more on AI

International Business Machines shares plunged more than 23% on Tuesday, marking their steepest single-day decline in decades after the technology company released preliminary second-quarter results that fell short of Wall Street expectations.

The hardware, software, and consulting company reported adjusted earnings of $2.93 per share on revenue of $17.2 billion, missing analysts' expectations of earnings of $3.01 per share and revenue of $17.86 billion, according to FactSet.

The sharp sell-off reflected investor disappointment over weaker-than-expected performance across several business segments, particularly software and infrastructure.

IBM said software revenue increased 5% during the quarter, consulting revenue was broadly flat, rising 1% at constant currency, while infrastructure revenue declined 7%.

The company said it would provide additional details and discuss its full-year outlook during its scheduled earnings conference call on July 22.

Customers shifted spending to AI hardware

Chief Executive Arvind Krishna attributed the disappointing quarter to an unexpected shift in customer spending toward AI-related hardware purchases.

"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 said in a letter to 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 execution issues also contributed to the weaker performance.

The comments underscore how the ongoing AI infrastructure boom is redirecting enterprise technology budgets toward high-performance computing equipment and memory hardware, leaving some traditional software vendors under pressure.

IBM continues to trail larger technology rivals

IBM has struggled to match the growth rates posted by many of its large-cap technology peers.

While companies such as Microsoft and Amazon continue to deliver double-digit revenue growth, IBM's business has largely remained in the single-digit growth range despite its push into hybrid cloud and artificial intelligence.

The latest decline also follows another sharp setback earlier this year.

In February, IBM shares dropped more than 20% after AI startup Anthropic introduced a tool designed to modernize COBOL, the programming language that powers many IBM mainframe systems.

The announcement raised concerns that generative AI could accelerate software modernization without relying as heavily on IBM's traditional consulting and services business.

Company highlights AI and quantum initiatives

Despite the disappointing quarter, Krishna highlighted several strategic initiatives aimed at strengthening IBM's long-term growth.

He said IBM and Red Hat had rapidly developed Lightwell following the introduction of Mythos.

Lightwell represents a $5 billion commitment supported by frontier AI capabilities and a global workforce of more than 20,000 engineers focused on helping enterprises identify and address open-source software vulnerabilities.

Krishna said early adopters include Bank of America, BNY, Citi, Goldman Sachs, JPMorganChase, Mastercard, Morgan Stanley, Royal Bank of Canada, State Street, Visa, and Wells Fargo.

General availability of the platform was announced on July 8.

Krishna also reiterated IBM's commitment to quantum computing.

"Finally, quantum computing is no longer decades away; it is upon us, and we are investing aggressively," he said.

IBM recently announced a letter of intent with the US Department of Commerce to build Anderon, which it described as the world's first pure-play quantum wafer foundry.

The project will be backed by $1 billion in CHIPS Act incentives and an additional $1 billion cash contribution from IBM.

The company also plans to invest more than $10 billion in quantum computing over the next five years across research and development, manufacturing expansion, acquisitions, and ecosystem development.

Krishna said IBM remains on track to deliver its first large-scale fault-tolerant quantum computer by 2029.