IBM shares lost around a quarter of their market value on Tuesday. This is the worst fall for the security on a single trading day since IBM’s IPO almost 111 years ago. The trigger is the unscheduled publication of preliminary financial figures that do not meet the expectations of the financial market. Sales increased year-on-year, but not as much as analysts had expected.
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Even the unusual step of publishing financial data out of schedule is unsettling the market. Listed companies generally follow a strict calendar; Dates for publication of quarterly figures are announced in advance so that market participants can prepare for them.
But Tuesday morning (New York time) CEO Arvind Krishna issued an open letter to IBM shareholders. “I would like to take the time to explain what we experienced in the quarter that led to the underperformance in software and infrastructure that you see (in the numbers),” Krishna opens. In the second quarter, IBM released z17, a new generation of its mainframes. Because new mainframe computers first have to prove themselves, IBM expected a decline in sales in the infrastructure division, but not the eventual decline of seven percent. If fewer mainframes are purchased, less suitable software is also purchased. Overall, this division still grew by five percent.
Chipflation leads to budget reallocation
The reason for the unexpectedly sluggish demand is the increase in the price of servers and storage (“chipflation”) triggered by the AI boom. In June, customers, expecting further price increases, quickly ordered servers, hard drives and RAM. This budget reallocation means that mainframe orders will be postponed until later. In addition, the rapidly deteriorating IT security situation “distracted” potential mainframe buyers.
“We did not adapt and move quickly enough,” complains Krishna, “Numerous large contracts did not come about in the expected time frame, which accounts for the majority of our shortfall in income. These are not excuses, but realities.”
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The fall in IBM shares follows significant price gains in recent weeks. The stock is now back at the price level of two months ago.
The preliminary numbers
Quarterly sales rose one percent to $17.2 billion. Consulting is running stable, but is said to have concluded more new contracts thanks to generative AI. As mentioned, infrastructure sales fell by seven percent, while the software business grew by five percent. Red Hat in particular contributed to this with an increase of eleven percent. Krishna’s letter does not comment on the sales development of the fourth division, lending to customers.
Gross profit fell by seven per thousand to $9.9 billion. There was a loss of four and a half percent in the pre-tax profit of continuing operations: 2.5 billion US dollars. Operating cash flow increased 53 percent to $2.6 billion. However, if you look at the operating cash flow without outstanding customer loans, there is a decline of almost nine percent to $2.9 billion.
IBM’s quarterly accounting is not yet complete. The values can still change until the scheduled publication of more comprehensive figures on July 22nd.
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