IBM shares plunged about 23% on Tuesday after the company warned that second-quarter sales and profit would fall short of Wall Street expectations. The company said customers were redirecting capital toward servers, storage and memory, while software and consulting contracts declined.
IBM expects second-quarter revenue of $17.2 billion, up 1% from a year ago but below analysts’ expectations. Software revenue increased 5%, consulting revenue was flat and infrastructure revenue fell 7%. Adjusted earnings per share are expected to reach $2.93.
Chief Executive Officer Arvind Krishna said the change in customer investments occurred at the end of the quarter.
“In the final weeks of June, we saw customers shifting their quarterly capital expenditures to purchasing servers, storage and memory to secure supply-constrained infrastructure from expected price increases,” Krishna wrote in one Letter to investors. “While we anticipated some impact on the supply chain, we did not anticipate the extent of the re-prioritization of capital spending.”
The CEO also noted industry-wide cybersecurity issues that distracted customers during the quarter and credited IBM’s execution.
“We did not adapt and act quickly enough, and numerous large deals failed to close on the expected schedule, which accounted for the majority of our deficit,” Krishna wrote.
The comments suggest that customers have not given up on AI spending. Instead, they invested capital in hardware purchases to protect limited infrastructure from expected price increases.
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The distributed infrastructure is growing
While IBM’s infrastructure segment fell 7%, its distributed infrastructure business posted its strongest quarter on record.
Krishna said distributed infrastructure revenue increased 37%, driven by power systems and storage, with an order backlog of $500 million at quarter-end.
The contrast suggests that customers continue to invest in cloud and edge environments today IBM’s z17 mainframe The cycle and the associated software stack fell short of expectations.
For data center operators, IBM’s update offers little sign that business investment in AI infrastructure is slowing.
Instead, it is recommended that organizations continue to secure compute, storage and supporting infrastructure before increasing their spending on software and services. This sequence could sustain demand for power, high capacity, storage and network infrastructure even as some enterprise software projects progress more slowly.
Dave McCarthy, research vice president for cloud and edge infrastructure services at IDC, said Knowledge of data centers The company observes the same pattern across the enterprise market.
“IDC is absolutely experiencing an intense ‘infrastructure-first’ period in the broader enterprise market,” McCarthy said. “Many companies are aggressively allocating their capital expenditures to secure high-performance servers, storage and memory. They are doing this not only to keep up with AI requirements, but also to set supply and pricing ahead of expected cost increases.”
Neil Osnato, founder of Persistence Analytics Group, said Knowledge of data centers IBM’s findings reflect a broader sequencing problem rather than companies’ weakening interest in AI.
“Many organizations are still in the AI infrastructure building phase,” Osnato said. “They prioritize servers, memory, storage, data center capacity, power availability and physical execution before fully scaling software and consulting spend.”
“AI demand is real, but the order of spending is inconsistent,” he said. “Hardware and infrastructure can advance while software and services lag.”
Execution or market shift?
Zeus Kerravala, founder and chief analyst at ZK Research, said Knowledge of data centers The trend in infrastructure spending doesn’t fully explain IBM’s results.
“I would see this primarily as an IBM execution problem that runs counter to a very real AI-driven infrastructure spending cycle,” Kerravala said.
As customers prioritize investments in servers, storage and memory to support AI workloads, vendors with compelling AI and hybrid cloud strategies should continue to pursue software and consulting contracts, he said.
“This gap suggests that IBM is still struggling to translate its AI story into a differentiated sales movement, and customers are currently willing to finance on the software and services side.”
https://www.datacenterknowledge.com/business/ibm-warns-ai-infrastructure-spending-delays-software-deals-as-shares-plunge
