IBM reported better-than-expected revenue and profit for its second quarter on Wednesday, but it wasn’t enough to please Wall Street. The company’s stock fell 5% in after-hours trading after it revealed that sales in its all-important software division fell short of expectations, overshadowing good news in other parts of the business.
The main problem for investors was the software segment, which has traditionally been a reliable bright spot for the company. It reported sales of $7.39 billion, just missing the $7.41 billion that analysts had hoped for. The reason for the slump is ironic.
IBM’s finance chief, Jim Kavanaugh, explained that customers are rushing to buy the company’s new AI-specialized mainframe computers. This spending boom on new hardware has diverted funds away from the traditional software that runs on those machines, which has hurt the software unit’s performance.
In contrast, the infrastructure segment, which includes the popular mainframes, easily beat sales estimates with $4.14 billion in revenue. The company’s consulting business also returned to growth after five consecutive quarters of decline, as more businesses seek help in integrating AI products.
IBM also noted that its “AI book of business,” a measure of sales and bookings related to artificial intelligence, grew by $1.5 billion from the previous quarter, now totaling $7.5 billion.
Despite the strong overall numbers, the miss in the software division was a red flag for investors, who have pushed IBM’s stock up nearly 30% this year on the hope that its software business would be a reliable engine of growth. As one analyst put it, there’s “just not a lot of room to miss” when expectations are that high.
