IBM Sees Rebound After Q2 Software Shortfall

IBM's second quarter software shortfall was largely due to a shift in customer spending priorities towards supply chain constrained hardware and cybersecurity-focused software, according to CEO Arvind Krishna.

In a recent earnings call, Krishna attributed the shortfall to a 'capex sensitive area' of IBM's portfolio, but emphasized that the company has already started to see a rebound.

CFO James Kavanaugh explained that the shift in client spending priorities was driven by customers purchasing servers, storage, and memory to secure supply-constrained infrastructure ahead of expected price increases.

The shortfall resulted from a significant number of 'large deals' being delayed or cancelled, with Krishna stating that about one-third of these deals had since closed. He added that IBM has engaged with clients on the transactions that slipped and is adapting to deliver greater business value to clients around its innovation.

Krishna expressed confidence in the company's ability to grow and drive shareholder value, citing plans to increase the use of AI to help scale software development, bolster sales and marketing efforts, and optimize supply chain operations. He also highlighted IBM's recent software-focused acquisitions, including Red Hat, HashiCorp, and Confluent, which power a majority of the company's high-margin subscription-based recurring software revenues.

Kavanaugh added that these acquisitions have shown strong momentum, with HashiCorp registering 'record bookings' during the quarter, Confluent getting off to a strong start, and Red Hat posting an increase in revenue growth with its OpenShift platform hitting $2.2 billion in annual revenue run rate.