According to the Wall Street Journal on the 22nd (local time), IBM presented an annual revenue growth outlook of 4-5%.
The company had previously expected annual revenue to grow by 5% or more, but adjusted its outlook downward to reflect weak second-quarter performance.
IBM's lowered forecast was attributed to customer IT budget reallocations and mainframe sales declines that exceeded expectations.
CEO Krishna explained that IBM is in the early stages of changing its business structure, while acknowledging that strategy execution fell short of expectations in the second quarter.
▲ Mainframe Sales Plummet 42%
IBM's second-quarter infrastructure segment revenue was $3.8 billion, down 7% year-over-year.
In particular, a sharp 42% decline in mainframe sales for data centers dragged down overall infrastructure business performance.
IBM's mainframes are high-priced servers used by large enterprise customers in financial and retail sectors to operate critical business systems.
Since mainframes have long replacement cycles and large contract values, customer delays in purchasing significantly impact IBM's quarterly results.
▲ Q2 Revenue $17.2 Billion, Net Income $2.2 Billion
IBM reported second-quarter revenue of $17.2 billion and net income of $2.2 billion.
The company maintained its forecast that this year's free cash flow would increase by approximately $1 billion compared to last year, despite weak performance.
However, as the company lowered revenue growth guidance and confirmed poor performance in its core infrastructure business, investors found it difficult to address performance concerns with cash flow projections alone.
▲ Weak Performance Due to Failure to Close Dozens of Large Contracts
IBM Chief Financial Officer James Cavanaugh disclosed that the company's failure to finalize dozens of contracts during the second quarter was a major cause of poor performance.
IBM explained that it closed approximately one-third of delayed contracts after the quarter ended.
CEO Krishna reasoned that based on this, the contracts did not completely disappear but were merely delayed in timing.
IBM emphasized that there were no changes to its business strategy itself and that delayed contracts could be reflected in future quarter revenues.
▲ $67 Billion in Market Capitalization Erased Following Pre-Earnings Disclosure
IBM took the exceptional measure of publicly disclosing disappointing results ahead of scheduled earnings announcement through an investor letter on the 14th.
CEO Krishna stated in the letter that the company fell short of expectations in the second quarter.
IBM's stock price plummeted 25% in a single day following the pre-disclosure, and approximately $67 billion in market capitalization evaporated.
The stock subsequently declined an additional 5%, and investor concerns persisted.
IBM's board discussed whether to pre-disclose results and determined that enhancing transparency to secure market trust was preferable.
▲ Customer Budgets Shift to AI Servers and Memory
IBM explained that customers prioritized allocating end-of-quarter IT budgets to AI-related hardware purchases instead of traditional software and mainframes.
Concerned about potential increases in AI server, storage, and memory prices, companies redirected budgets to secure equipment in advance.
CEO Krishna explained that while customers had planned to purchase IBM products until just before contract closure, they reallocated budgets as other hardware costs increased faster than expected.
This demonstrated that expanded AI investment does not provide uniform benefits to all technology companies, analysts said.
▲ Expanded AI Investment Erodes Traditional Data Center Budgets
IBM's weak performance revealed a different type of risk than concerns that AI could replace existing software.
While Salesforce, Workday, and Snowflake faced potential software demand declines due to AI, IBM faced AI infrastructure spending eroding existing hardware budgets.
Enterprise customers delayed mainframe and traditional server replacements in their own data centers and concentrated budgets on AI GPU and memory purchases.
For IBM, AI market expansion acted as both a new revenue opportunity and a factor delaying existing business demand.
▲ Long-term AI Infrastructure Supply Shortage Expected
IBM forecast that supply chain constraints in AI-related server and memory markets would be difficult to resolve in the short term.
CFO Cavanaugh explained that most companies in the industry expect supply shortages to continue for a considerable period.
If competition for AI equipment acquisition persists, enterprise customer budgets may be prioritized for AI infrastructure while traditional mainframe and data center equipment replacements could continue to be delayed.
This meant IBM's infrastructure business could face continued uncertainty in the second half.
▲ Limited AI Boom Benefits Compared to Nvidia and AWS
While IBM generates substantial data center revenue, its direct benefits from expanded AI infrastructure investment are more limited than competitors.
Nvidia and AMD have grown through AI chip sales, and Amazon Web Services absorbed cloud computing demand for AI model training and operation.
In contrast, IBM has a higher proportion of revenue from traditional servers and mainframes installed in enterprise customer data centers, limiting its benefits from expanded AI investment.
Instead, it faced near-term headwinds as customers delayed existing system replacements to purchase AI equipment, analysts said.
▲ Emphasis on AI Transformation Through Software and Consulting
CEO Krishna emphasized that despite weak performance, IBM is positioned to support customer AI adoption through software, infrastructure, and consulting businesses.
IBM pursued a strategy combining enterprise AI platforms, hybrid cloud, and consulting services to help customers generate tangible value from AI.
However, the market assessed that execution capability to convert business portfolio potential into actual contracts and revenue is more important.
CEO Krishna also acknowledged that the future challenge lies in execution rather than the strategy itself.
IBM logo(Photo : [Reuters/Yonhapnews])
▲ Concerns Raised About Mainframe Exodus
The market raised concerns that companies could migrate from mainframes to the cloud if they modernize existing business systems using AI tools.
If enterprises rent computing resources from cloud providers instead of operating mainframes in their own data centers, IBM's core business could be structurally diminished.
However, CFO Cavanaugh stated that the company found no evidence that customers are abandoning mainframes.
IBM maintained its position that the second-quarter sales decline resulted from customers adjusting purchase timing rather than structural mainframe demand collapse.
▲ Infrastructure Business Growth Expected in Second Half
Despite weak Q2 performance, IBM expected second-half infrastructure business revenue to increase.
However, mainframe sales are expected to remain below last year's levels.
If delayed contract volumes materialize in the second half and new server demand emerges, the overall infrastructure business could grow, but how other products offset mainframe weakness became the key factor, analysts said.
▲ Krishna's Leadership on Trial
This performance setback and sharp stock decline brought CEO Krishna's leadership to market scrutiny.
Surrounding IBM, which has approximately 260,000 employees, discussions emerged about potential business division and activist investor involvement.
The board was expected to hold another meeting at the end of July, and Wall Street's pressure to not tolerate continued poor performance intensified.
Analysts said there is a possibility that market demands will expand for IBM to pursue faster growth strategies centered on software and consulting or to restructure lower-margin businesses.
▲ Actual Revenue Conversion of Delayed Contracts Key
If, as IBM claims, the second-quarter contract slowdown was merely a delay rather than a cancellation, recovery could appear in second-half results.
However, if delayed contracts are further postponed or customers continue concentrating budgets on AI infrastructure, it would be difficult to exclude the possibility of another downward revision in growth forecasts.
IBM's future stock price and enterprise value depend not only on AI growth in software and consulting segments but also on maintaining stable mainframe demand and converting delayed large contracts into actual revenue, analysts said.
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