IBM (IBM.US) preliminary results fall short of expectations, stock price plunges by 24%, profit forecasts slashed by multiple Wall Street institutions.

IBM (IBM.US) announced preliminary results for the second quarter on Tuesday, with both revenue and profit below market expectations, causing the company's stock price to plummet by about 24% midday. CEO Arvind Krishna admitted that the quarterly performance was "disappointing," mainly because several large transactions were not completed as planned, and customer capital expenditures shifted towards infrastructure such as servers, storage, and storage chips, dragging down IBM's software and infrastructure business performance. According to the preliminary results, IBM's revenue for the second quarter was $17.2 billion, a 1% increase year-over-year, lower than the market's expected $17.85 billion; adjusted earnings per share (EPS) are estimated to be $2.93, also below the market's expected $3.02. Krishna stated in a public letter to investors that the company did not adapt quickly enough to market changes at the execution level, with several large projects failing to be signed as expected, leading to the performance falling short of expectations. "The current market environment requires teams to execute efficiently, and this quarter we did not do that. We did not adjust our strategy quickly enough, causing many large transactions to not be completed as planned, resulting in most of the shortfall in this quarter's performance." By business segment, IBM's consulting business revenue remained flat, growing 1% year-over-year at constant currency rates; infrastructure business revenue declined by 7% year-over-year. Krishna noted that in April of this year, the company had expected the infrastructure business to only experience a low single-digit decline for the full year due to the high base effect from the launch of the new generation mainframe z17. However, the actual performance was weaker than expected, with mainframe and accompanying software, especially transaction processing, showing weak performance as the main drag. Additionally, Krishna pointed out that in the last few weeks of June, the company observed customers reallocating quarterly capital expenditures to relatively tight supply infrastructure products such as servers, storage devices, and storage chips to lock in supply before prices rose. This change disrupted customers' original procurement plans, impacting demand for IBM's related products. He also mentioned that while the company had anticipated some impact from supply chain factors, they did not expect the extent to which customers would reallocate capital expenditures. Furthermore, the ongoing upgrading of network security issues in the industry has lengthened enterprise procurement decision cycles. Despite the disappointing performance in the second quarter, Krishna emphasized the company's confidence in its product portfolio and strategic transformation, and plans to introduce new reform measures to accelerate existing strategy execution to improve future operational performance. IBM will hold its official earnings conference call on July 22 and announce full-year performance outlook. It is worth noting that there are mixed performances within IBM's software business. The company stated that Red Hat's revenue growth further accelerated to 11%, and recently acquired businesses like HashiCorp and Confluent also showed strong performance. In terms of profit margins, IBM's preliminary gross margin for the second quarter was 57.7%, a 100 basis point decrease year-over-year; adjusted gross margin was 59.4%, down 70 basis points year-over-year. As of now, the company has generated $7.8 billion in operating cash flow and achieved $4.8 billion in free cash flow (FCF) year-to-date. Following the announcement of the results, several Wall Street institutions have lowered their profit expectations for IBM. Citi stated that this earnings warning was rare, as delays in large transactions and the shift of customer capital expenditures towards servers, storage, and storage chips not only dragged down the mainframe business but also compressed software spending, especially transaction processing. Citi believes that this may further reinforce market concerns about IBM becoming a "laggard in AI." However, the firm still maintains a "buy" rating on IBM with a target price of $375. Bank of America Corp also maintains a "buy" rating but lowered the target price from $330 to $280. Analysts believe that both software and infrastructure businesses were significantly weaker than expected and anticipate that IBM will lower its full-year guidance, especially as software business growth is expected to be significantly below the previous double-digit growth target. HSBC downgraded IBM from "hold" to "reduce" and lowered the target price from $231 to $191. HSBC believes that compared to peers like SAP (SAP.US) and Accenture Plc Class A (ACN.US), IBM's future growth sustainability is relatively weaker, and the quantum computing sector is facing increasingly fierce competition from rivals like IonQ (IONQ.US).