IBM, the US multinational IT company, failed to close a series of “large deals” within the expected timeframe in the second quarter and recorded performances significantly lower than expected in the Z17 supercomputer business (generation of mainframes – very high performance data processing systems – designed to manage the most critical IT infrastructures in the world, such as those of large banking institutions, insurance companies, governments and global payment circuits), at a time of strong competition between the large hyperscalers to increase the computing capacity for cloud and AI. These are the reasons behind the collapse of the stock, which lost over 23.5% in pre-opening trading on Wall Street.
Incorrect forecasts: 700 million dollars less
The American software giant expected to close the second quarter with a turnover of 17.2 billion dollars, with an increase of 1% compared to the previous year, compared, however, to a market forecast of 17.9 billion. Breaking down the data, IBM has forecast an increase in revenue from the software branch of 5%, consultancy revenues unchanged (or an increase of 1% at constant rates) and a contraction in revenue from the infrastructure branch of as much as 7%.
Profitability
On the profitability front, the company forecast a GAAP gross profit margin of 57.7%, down 100 basis points, as well as a pre-tax profit margin of 14.4%, down 90 basis points. Earnings per share are estimated at $2.27, down 2%, while operating profit is seen at $2.93 (+5% y/y).
“Z performance drop”
Giving reasons behind the lower-than-expected estimates for the second quarter, CEO Arvind Krishna explained in the letter to investors that the company had expected revenue in its Infrastructure division to decline by a low single-digit percentage for the full year, starting this quarter. However, “what happened was worse than our expectations, due to a decline in the performance of Z and its software stack, mainly in the area of transaction processing,” explained the CEO.
In the final weeks of June, the company also found customers shifting their investments into servers, storage and memory to avoid industry-wide supply shortages, hurting the company’s software spending. “Although we anticipated some supply chain impacts, we did not anticipate the extent of the reorganization of customers’ capital spending priorities,” added IBM.
“We didn’t adapt quickly enough”
According to the manager, IBM “failed” in the quarter because “we did not adapt and act quickly enough, and numerous large deals did not close on time, causing the majority of our deficit.”
“These are not excuses, but reality. Our job is to help clients deal with uncertainty, to find solutions to grow their businesses, regardless of what happens in the external context,” he concluded.