IBM lowered its full-year revenue growth forecast to 4% to 5% after releasing its latest earnings report on July 22 Eastern Time, pointing to softer demand for large mainframe systems as the main reason for the revision.
Second-quarter revenue rose about 1%, while mainframe sales fell 42%
For the second quarter, IBM reported total revenue of $17.2 billion, up about 1% year over year. Within the infrastructure segment, mainframe sales dropped 42%, reflecting a cooldown in demand as the current mainframe product cycle moves toward its end.
Chief Financial Officer Jim Kavanaugh said IBM now expects full-year revenue growth of 4% to 5%, compared with its previous forecast of more than 5%. He said the change was mainly tied to slower demand for mainframes and related systems software.
The report said Wall Street analysts had already been prepared for the adjustment, and management maintained that the rest of the business remained in solid shape. Even so, weakness in the core hardware business has limited IBM’s near-term revenue momentum.
Shift in enterprise spending toward AI hardware adds pressure
IBM said a broader shift in corporate capital spending toward artificial intelligence hardware is creating structural pressure on its traditional hardware and software operations.
In recent years, IBM has pushed to reshape itself into a higher-growth software company through acquisitions including Red Hat, HashiCorp, and Confluent. That strategy, however, has also exposed the company to a different set of market risks. Investors have been watching whether the spread of generative AI tools could disrupt conventional software business models.
One recent example cited in the report involves market discussion that Starbucks may replace IBM software with internally developed tools. The case points to a possible trend in which enterprise customers build some non-core applications in-house in the AI era.
IBM speeds up cost controls while keeping free cash flow target
To respond to changing business conditions, IBM said it will accelerate cost-saving measures aimed at preserving financial stability and supporting shareholder returns.
Kavanaugh said the company plans to reduce third-party technology spending, optimize supply chain management, and streamline administrative functions to lower operating costs. He also said total headcount is expected to remain broadly stable this year.
Despite the weaker demand environment, IBM kept its existing financial guidance for free cash flow. The company still expects full-year free cash flow to increase by about $1 billion from the prior year.