IBM cuts full-year sales outlook as mainframe demand drops

International Business Machines Corp. cut its full-year sales outlook, including for its closely watched software unit, after reporting a dip in demand for its mainframe business.

Revenue will increase 4% to 5% this year, down from a prior outlook of more than 5%, the company said Wednesday in a statement. Software unit annual sales will gain 6% to 8%, Chief Financial Officer Jim Kavanaugh said in an interview.

This reduction is “better than feared,” Amit Daryanani, an analyst at Evercore ISI, wrote in a note after the results were released. Many on Wall Street anticipated that IBM would cut its outlook after the company reported preliminary earnings last week that showed weak sales for its infrastructure and associated software.

Big Blue has refashioned itself as a high-growth software company through major acquisitions of Red Hat, HashiCorp and Confluent. But its new focus has made it a target for investors concerned that artificial intelligence tools will disrupt many software business models. Despite the focus on software, strong sales of the company’s new mainframe computer models, which began last year, had propelled revenue growth. Those sales plummeted 42% in the second quarter, which ended June 30.

On a call with analysts, IBM’s executives gave an impassioned defence that the quarter reflected a temporary pause among some customers, not a long-term shift away from the company’s products. “We see no evidence of clients moving off the mainframe,” Chief Executive Officer Arvind Krishna said.

IBM said it will accelerate cost-saving initiatives and continues to expect an additional $1 billion in free cash flow this year. This will be accomplished through reducing third-party tech spending, better management of the supply chain and reducing administrative costs, Kavanaugh said. Overall company headcount should be about flat for the year, he added.

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Total revenue increased about 1% to $17.2 billion. Earnings, excluding some items, were $2.93 per share. The company’s outlook suggests “some improvement” over the course of the year, said Anurag Rana, an analyst at Bloomberg Intelligence, in an interview on Bloomberg Television.

Kavanaugh said the reduction in the forecast is tied to mainframes, and the rest of IBM is performing “extremely well.”

Still, the defence ultimately failed to win investors over. The shares, which had risen about 2% after the results were released, erased the gains in extended trading. The stock closed at $205.77 in New York and has declined 31% this year, including a 25% drop in a single day after the preliminary earnings were announced.

Earlier this month, Bloomberg reported that Starbucks Corp. was looking to replace software from IBM and other vendors with internally built tools. Kavanaugh said that Starbucks spends about $2 million per year with IBM on an application he agrees is “prime to be disrupted by AI.” By contrast, most of IBM’s software is much harder to replace because it sits closer to the business’s infrastructure and data, he said.